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Latin America Facing the Challenges of Adjustment and Growth

Volume 6 Mitigating the Social Costs of Structural Adjustment Programs

J oao do Carmo Oliveira, editor

Assisted by: Caroline Fawsett Kamlesh Gillespie

1992 EDI WORKING PAPERS v.6

NATIONAL ECONOMIC MANAGEMENT DMSION

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Latin America Facing the _Challenges

of Adjustment and Growth

Volume6 Mitigating the Social Costs of

Structural Adjustment Programs

Joao do Carmo Oliveira, editor

Assisted by: Caroline Fawsett Kamlesh Gillespie

EDI Working Papers are intended to provide an informal means for the preliminary dissemination of ideas with the World Bank and among EDfs partner institutions and others interested in development issues. Copies are available from:

Training Materials Center, Room M-P1-010 Economic Development Institute, World Bank 1818 H Street NW, Washington, DC 20433, USA Telephone: (202) 473-6351, Facsimile: (202) 676-0965

The Economic Development Institute of The World Bank

1992

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EDI Catalog No.: 400/095 '' '

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The findings, interpretations, and conclusions expressed in this document are entirely those oftheauthor(s)andshouldnotbeattributedinanymannertotheWorldBank,toitsaffiliated organizations, or the members of its Board of Executive Directors or the countries they represent.

Copyricht e 1992 by the International Bank for Reconstruction and Development The World Bank enjoys copyright under protocol2 of the Universal Copyright Convention. This material may nonetheless be copied for research, educational, or scholarly purposes only in the member countries ofThe World Bank. Material in this series is subject to revision. The views and interpretations in this document are those of the author(s) and should not be attributed to the EDI or to The World Bank. If this is reproduced or translated, EDI would appreciate a copy.

TABLE OF CONTENTS

Preface .......................................................................................... ii

Section I

Abstract ................................................................................. l

Mitigating the Social Costs of Adjustment Programs in Latin America: Issues and Polides ........................................ .2

Roberto Macedo

Section II

Abstract ............................................................................... 2 6

Social Policy During Adjustment The Poor and Beyond ........ .27 Vanessa Cartaya and Gustavo Marquez

Preface

In July 1990, the National Economic Management Division (EDIEM) of the World Bank's Economic Development Institute conducted a Senior Policy Seminar that examined the issues of adjustment and growth in Latin America. The three day seJ11inar held in Caracas, Venezuela brought policymakers and academicians together to discuss their experiences in Latin America and to compare these experiences with those outside the region. The seminar was directed by JoaO do Carmo Oliveira, at that time of the National Economic Management Division (EDIEM) and now in the Bank's South Central and Indian Ocean Department Country Operations Division (AF3CO). The discussion of the seminar revolved around two themes: the consensus on the main causes and consequences of the current Latin American instability and the conditions for achieving stability and equitable growth in the next decade.

The seminar was organized around sixteen papers offered in three modules:

l. A Diagnosis of the Current Situation: Divergency or Consensus?

II. Structural Adjustment and Conditions for Stable Growth

III. Restoring Policy Credibility

The two papers in the first module examined the policy consensus and divergence ·within the adjustment process and established a policy framework for the seminar's discussion. The ten papers of the second module addressed the topics of macroeconomic balance, public sector rationaliztion, trade reform, domestic economy deregulation, and the social costs of adjustment. The third ·module focused on the topics of debt management and investment recovery and financing. Two country cases were presented on each topic: one an insider's analysis of a Latin American country, and the second a succesful country experience outside the region.

Aiming at a wider dissemination of the seminar's findings, EDIEM publishes these sixteen papers along with the rapporteur's report as EDI Working Papers. The first series relates to Module I, and reviews the diagnosis of the Latin American economies. The papers included in this section are:

The Rapporteur's Report by Eliana Cardoso.

u Adjustment and Stabilization: Review of Some Latin American Experiencesu by~ Frenkel, and

NOn the Origins and Course of Latin America's Economic Crisisu by John Williamson.

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The second module on "Structural Adjustment and Conditions for Stable Growth" covers five topics and is published in sets of two papen as follows:

Restoring Macroeconomic Balance

"The Process of Restoring Macroeconomic Balance in Israel" by Nissan Livia tan

"The Big Bang Approach to Macro Balance in Venezuela: Why so Sudden? Why so Painful" by Ricardo Hausmann

Structural Adjustment: Rationalizing the Public Sedor

"Structural Adjustment and Rationalization of the Public Sector in Indonesia, 1983-1988", by Erik Thorbecke

"Rationalizing the Public Sector: the Mexican Experience in 1982-1990'' by Guillenno Ortiz and Carlos Noriega

Structural Adjustment: Reforming the Trade Regime

"Spain's Experience of Structural Adjustment: Reforming the Trade Regime" by Angel Torres

"Trade Reforms in Chile: Policy Lessons for the Nineties" by Ricardo Ffrench-Davis and Joaquin Vial

Structural Adjustment: Deregulating the Domestic Economy

"Deregulating the Domestic Economy: Korea's Experience in the 1980s" by Kihwan Kim

''Structural Adjustment: Internal Deregulation of the Bolivian Economy, 1985-89" by Juan L. Cariaga

iii

Mitigating the Social Cost of Structural Adjustment Programs

-Mitigating the Social Costs of Adjusbnent Programs in Latin America: Issues and Policies"' by Roberto Macedo

USocial Policy During Adjustment: the Poor and Beyond"' by Vanessa Cartaya and Gustavo Marquez

The last module on ~toring Policy Credibility" covers two topics·and again is published in sets of two papers as follows:

Managing Domestic and External Debt

"Debt Management in Turkey: Any Lessons for Latin America"' by Dani Rodrik

"Renogiating External Debt: An Inside View of the Case of Costa Rica" by Eduardo Lizano and Silvia Charpentier

Investment Recovery and Financing

"Investment Recovery and Financing: Thailand"' by Virabongsa Ramangkura

. "Investment Determinants and Financing in Colombia"' by Antonio Ocampo

Peter T. Knight Chief

Natio1Ull Economic Ma1Ulgement Division Economic Dtt~elopment Institute

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· Mitigating the Social Costs of Adjustment Programs in

Latin America: Issues and Policies

Roberto Macedo

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Abstract

The structural adjustment policies of the 1980s had a severe negative social impact. Hyperinflation, drastic government expenditure cuts, and rampant open unemployment lowered the standard of living throughout Latin America. This paper evaluates the social impact of these refonns with particular attention to Brazil. The author fin~s the indicators of morbidity, infant normality, and drop-out rates of ed1,1cation all worsening in Brazil. Additionally, the demand for entitlement in health and education soared and the fiscal revenues to pay for these services significantly decreased during this period.

The policy reaction to these deteriorating social conditions was limited at best. The author presents three country cases: Brazil, Chile, and Bolivia. Except for Chile, which has a long tradition of social programs, the other two countries provided only fragmentary social policy. The policy alternatives for a social safety net remain the main agenda for the 1990s. Two schools of thought have emerged: the World Bank approach of targeting, and the UNICEF approach of "adjustment with a human face". The author evaluates these approaches in the context of Brazil. The major conclusion is that the social programs should not be a reaction to the adjustment process, rather the two should be implemented in tandem. "Core expenditures" in education and health should be protected in the process and should be analyzed in conjunction with structural adjustment planning.

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1 MITIGATING THE SOCIAL COSTS OF ADJUSTMENT PROGRAMS IN LATIN

AMERICA: ISSUES AND POLICIES

Roberto Macedo

In Latin America, the 1980s were marked by economic adjustment policies that led to recession in various countries. ·Along with the adjustment policies arose the social costs of adjusting. Due to many reasons-economic, political, and social-most Latin American countries

· had not developed safety nets, such as unemployment compensation, emergency employment, and food distribution programs, that could relieve the social costs of adjustment. Moreover, the provision of public services in areas such as education and health have been in a process of decay because of a continuous expansion of entitlements to these services not matched by a corresponding increase in resources. This situation was aggravated by cuts in government social expenditures following the adjustment policies. These

. concerns led to a discussion focusing on the adoption of social policies to mitigate the social costs of adjustment. Some countries began to adopt steps in this direction.

This paper reviews the current stage of this problem and its impact on the design of actual social policies. The first section reviews the adjustment policies of the 1980s and their social costs. The second section addresses the current stage of the discussion on ~ policy reform in Latin America. In the third section two approaches that are having an intellectual influence on the region are compared. The first is the UNICEF approach, known as adjustment with a human face, which proposes the adoption of policies to relieve the social costs of adjustment; the second is the World Bank approach also known as the social dimensions of adjustment.

In the fourth section the author's view of the problem is presented. I argue that a reform of social policies in Latin America must begin by correcting the gap between the expansion of entitlements to social services and the volume of resources that support them. The distortions of social policies, made evident by their failure to cope with aggravating social problems cannot be seen only as the result of adjustment policies adopted to correct chronic economic. imbalances that lead to inflation and reduced growth; they also cause these imbalances by enlarging government deficits and misallocating resources. Thus correcting social policy distortions would also correct chronic imbalances that, in a self-feeding mechanism,

Roberto Macedo is on the staff of Department of Economics, University of Sao Paulo. Nancy Birdsall, Joao do Carmo Oliveira, Norman Gall, Caroline Fawcett, and Roberto Lunes have commented on and contributed to this paper.

Mitigating tile Social Costs of Adjustment Programs in lAtin Ameriaz: Issws and Policia 3

aggravate these distortions. The fifth section presents some concluding remarks. Throughout this report much of the discussion and examples emphasize Brazil's efforts because of the author's familiarity with that country.

The Adjustment Policies of the 1980s and their Social Impact

During the 1980s, several countries in Latin America adopted adjustment policies, particularly those faced with debt problems. The result of these policies can be followed through the annual evaluations that the United Nations Economic Commission for Latin America (ECLA) publishes in its bulletin Nof11s sobre Ia Econom{a y el Desarrollo. The evaluations show that these policies had a serious impact on economic growth. In Latin America as a whole, Gross Domestic Product (GOP) per capita fell by 8.3 percent in the 1981-89 period. The largest negative rates were noticed at the beginning of the decade, together with the sharpest increases in unemployment.

During this time, a debate emerged concerning the adoption of policies to mitigate the adjustment-induced social problems that were observed in countries whose population had become concentrated mainly in the urban areas, often following a process of industrialization. In Brazil as in the rest of of Latin America, the urbanization increased sharply in the 1950s. According to the Brazilian Census Bureau (IBGE) data, the urban population increased from 36 percent of the total in 1950 to 72 percent in 1985. This meant that there were 31.5 million inhabitants in urban areas in 1950 and 97.5 million in 1985. Following urbanization, industrialization, and institutional development, labor contracts also changed. Formalized and wage earning contracts replaced informal arrangements and rural forms of pay such as sharecropping, thus increasing the likelihood of open unemployment. In the face of such development, it could be expected that a crisis during the 1980s would have economic and social impacts v.ery different from those when the country was essentially rural.

In fact, the emergence of open unemployment, now in regions largely urbanized, confronted the countries with a new and serious social problem. Decades ago in the typically rural societies that characterized the Latin American scenery, the economic crises did not create a situation of serious unemployment in the urban areas, as these were not predominant and labor contracts were different; rather, they created mainly a fall in the income level of the rural areas. Moreover, a major part of agricultural activity as a whole was for subsistence purposes, again isolating it from the crises of the crops linked to the market at large, particularly the export markets.

With workers concentrated in the rural areas the countries did not suffer the impact of the recessions as they do today. The social problems were hidden in the rural areas and did not echo in the public opinion and among the political leaders. Even today, the sectors linked to the production of essential commodities such as food are less affected by the decline in demand that occurs in a recession. The most significant decline is found in the demand for durable and capital goods that are typically produced in urban areas, because families as well as firms seek to limit their expenses to what is essential in times of recession.

4 Mitigatirtg 1M Socilll Costs of Adjustmml ProgTams irt utirt America: Issues art4 Policies

When the country was essentially rural, society provided some safety nets through nongovernmental organizations (NGOs) supported by private contributions, particularly institutions linked to the churches social services network. Among these Saint Vincent of Paul's Society is recognized as a major force in poverty alleviation work, as well as for its network of hospitals known as the Holy Houses of Mercy. It was also very common for food to be given to the poor who would come to the homes of the middle class and the rich right after meals. In general, social assistance at that time was framed by the concept of charity in a pattern similar to that in ancient Europe. This system, however, collapsed in the process of industrialization and urbanization primarily because it was typical of the more socially integrated life of towns and villages and did not find a favorable ground in large urban areas whose growth also coincided with a decay of the Catholic Church's influence and of its social services.

In essence, the process of industrialization and urbanization meant that an economic crisis would have a different and more serious social impact. Moreover, this process was followed by a collapse of the social services provided by the private charities. At the same time, the government had not yet established itself as a supplier of specific safety nets for coping with the social effects of recessions, following the pattern observed in developed countries, where governments provided various forms of assistance as part of the overall development of the welfare state. In Latin America this move is still at a rudimentary stage. It is true that the governments of the region moved into areas such as health and education but, as it will be shown later in this paper, the provision of these services went into decay before it was fully developed.

It was in this scenario of adjustment policies and fragile social safety nets that concerned persons and institutions began to investigate the social effects of recessions. It was in Brazil, due to UNICEFs influence, that repeated attempts were made to analyze these social problems. In one analysis, the idea was to verify the increase in unemployment, poverty, and other social costs of the adjustment process. Three studies were developed for UNICEF that attempted to verify the social impact of adjustment, particularly on the children in the state of Sao Paulo, mainly in the metropolitan area around its capital (Macedo 1984, 1987; Macedo and Chahad 1988). In developing these studies the authors faced a paucity of appropriate data, lags between cause and effect, and other technical and informational problems. A major drawback was the difficulty of finding time-series data, because most of the literature on poverty provided cross­section studies that at a given moment attempt to show the correlation of poverty with indicators such as mortality, morbidity, birth weight, malnutrition, and other variables that reflect children's well being. In general, many of these indicators are not systematically surveyed over time. Another very important methodological question was to know, for instance, if infant mortality was increasing for reasons other than the recession.

The analysis provided here evolved from the weak conclusions that characterized the first study, with data available till 1983. Although there were some signs of deterioration due to recession, the methodological and data problems were too many to warrant strong conclusions. In the

Mitigating 1M SociQI Costs of AtljJIStment Prognms in Latin America: lsStUs antl Policia 5

second study, the data up to 1985 and the social indicators indicated the same aggravating trends. Finally, in the third study-the most recent one published only in Brazil with data up to 1987-the conclusions became even clearer. The time-series data extended for longer periods and the economy began to recover in 1984, thus creating a sequence of recession and recovery. This study verified that some of the correlations also had a cyclical character because with the recovery some indicators measuring child welfare also improved.

The most relevant and recent evidence of these studies is found in Macedo and Chahad (1988). There was an increase in unemployment from approximately 4 percent in 1980 to approximately 7 percent at the bottom of the recession in early 1984. There was also a decline in the average earnings of workers' with the major drop occurring in the informal sector. The infonnal sector expanded following the decrease of employment in the formal sector. These findings cover effects on the adult population. Another study by Pezzin (1986) showed an association between the increase of unemployment and the growth of crime against property.

As for the impact on children the more relevant evidence included the aggravating indicators of morbidity, particularly those linked to nutrition; an increase in infant mortality between 1983 and 1984 in which the causes of death were usually linked to nutritional problems such as malnutrition and gastroenterocolitis; and an increase in the dropout rate in the state's school system, which provides free primary and secondary education to the poor. To give an idea of the worsening of these indicators and of the importance attributed to the fact that they revealed changes that followed the recession-recovery cycle, table 1 shows the rates of infant mortality for Brazil, by region, from 1979 to 1987. Such data became available recently and covers the country as a whole rather than the state of Sao Paulo only. Infant mortality has been falling in Brazil following a long-run trend. The table shows an increase in these rates in 1983 in -all regions (except in the southern region) and in 1984 in the northern and center-western regions. Beginning in 1985 the rates recover their prior trend of decline.

Table 1 Brazil Infant Mortality Rates for the State Capitals by Region, 1979-1987

(per 1000 live births)

Reglo• 1980 1981 1982 1983 1984 1.985 1.986 1.987

Brazil 75.0 68.4 64.5 66.7 65.9 58.1 53.2 51.0 North 60.9 56.7 51.7 59.5 60.8 59.1 56.8 56.4 Northeast 115.7 103.4 97.4 107.2 103.3 88.3 79.3 76/J Southeast 53.4 49.5 46.8 47.2 44.3 4JJ.7 37.2 35.2 South 4.5.7 41.1 36.8 36.1 35.0 34.4 32.6 31.3 Center and west 58.5 54.3 50.1 51.7 54.4 42.8 41.7 41.5

Source: IBGE.

Even if infant mortality did not increase because of the recession, the worsening of other less serious indicators such as morbidity and school

6 Mitig11ting the Socisl Costs of Adjustmmt ProgT11111s in utin · Awrnic41: lssllft 11114 Policies

dropouts, would have been enough to show that there was a deterioration. Of course, one cannot guarantee that other causes have not affected the deterioration in infant mortality, as well as in other indicators. So far, however, nobody has presented an alternative or better explanation. SimOes (1989) explored some other causes of infant-mortality and, in the· end, accepted that the recession also played a role.

I conclude therefore, the adjustment policies of the 1980s had social costs not only in the general form of higher unemployment and lower income, but they also affected specific vulnerable groups, such as the children of Brazil.

Social Policy Reform in Latin Amedca: The Current Stage of the Debate

The adoption of adjustment policies followed by periods of economic recession or stagnation and the effects mentioned in the previous section led to a debate concerning the reform of social policies in the region. One topic for discussion was how to cope with the "adjustment poor" and other impacts felt in developing and semi-industrialized economies showing a high rate of urbanization. Unemployment and its measure became a new concern. As unemployment began to deteriorate, the discussion that followed led to the adoption of compensatory measures in various countries. This paper reviews three cases: Brazil, Bolivia, and Chile.

The outset of the recession caught Brazil unprepared to face its social consequences. The sharp increase in open unemployment, which began in 1981, emerged in an economy with a high degree of industrialization and in an advanced stage of urbanization, but without a network of social safety nets to cope with this new problem. Following the increase in unemployment and the reduction of income levels the problems caused an increase in the informal labor mar~ets, increased crime rates, and other social problems such as those described in the previous section.

The major response to these pressing problems occurred in the metropolitan area of Sao Paulo, Brazil's most important industrial area, where the increase in unemployment was stronger. These responses came in the form oE government organized improvements in the distribution of foodstuff in an attempt to reduce prices by reorganizing the markets. Some of the new measures then adopted included: "varejOes" (large retail sales), that provided vegetables, fruits, eggs, poultry, and meat, in minimum batches, to consumers at wholesale prires. This program was very successful and it remains in operation. Another program, "Sacolaes" (large bags) provided assorted fruits and vegetables sold in prepackaged bags at a fixed price per weight. Also very popular, the "sacolaes" program continues to be practiced. "Comboio de alimentos" (food convoys), provided basic household items at wholesale prices for consumers. This was discontinued after the recession ended. "Sopaes" (soup kitchens), were established in the poorest areas, such as the shantytowns. Most of them were discontinued at the end of the recession.

These programs were established as emergency measures and were joint ventures involving the government and the private sector. Moreover,

Mitigati"g the Social Costs of Adjustmmt Programs i" lAti" Amerial: Issves ~~~ Policies 7

although some of th~m have been discontinued, others did so well that they became standard market practice. They are run by market-stallers and business people, with the local authorities sometimes providing only a site, in the form of street markets.

Along with these emergency programs, unemployment compensation became a permanent feature in social policy brought about by the debate on the social costs of adjustment in Brazil. Its importance comes from its scope and because it constitutes a modern policy instrument that is designed to help workers in the formal sector in urban societies. Curiously unemployment compensation only began in 1986 when the recession had ended and further adjustment had been postponed. The idea, however, emerged when the debate on the social costs of adjustment reached a peak in the early 1980s. It became clear then that Brazil was ripe for the adoption of unemployment compensation; what was lacking was political will and pressure from the other problems facing by the economy.

The government was afraid that the Cruzado Plan, a stabilization program conceived at the end of 1985 and early 1986 would lead to a recession. When the decree-law that brought the plan in February 1986, was issued, it also introduced unemployment compensation on a regular, although very limited basis, since the government was concerned with the budget. implications of such a policy.

Whereas the "varejOes" and "sacol0es" were maintained by their very successes, unemployment compensation was sustained by the progress made by the concept of social policy during the recession. From then on, the existence of unemployment compensation was supported by its own political clientele, who also pressured for its extension. This occurred in 1989 both in terms of coverage and the value of the compensation.

The compensatory measures undertaken in Brazil in response to the recession were either minor ones, such as those that sought to make the price of foodstuffs more affordable, or came with delay, such as unemployment compensation. There was no concerted effort by the government, from the federal to the local level, to develop compensatory measures. Whatever was done was far from providing a reasonable compensation because, in addition to the weakness of its response to the aggravating social problems, the government's traditional structure of services also suffered from the recession. In fact, government social expenditure followed the economic cycle. Federal expenditures on social sectors fell21.4 percent in real terms between 1980 and 1984 and 22.6 percent between 1981 and 1984 (Viana et al. 1988, table 1, 141). Expenditures also fell at the state and local level in regions most affected by the recession. I An exception was the federal expenditure on nutrition programs that increased in real value. It grew from 0.03 percent of GOP in 1980 to 0.10 percent in 1984 (Peliano 1988, 208). Barraged by political pressure, the government expanded entitlement programs overall. The net result was that in per capita terms there was a reduction in the assistance provided to recipients. There is little information on how the recession affected the

1. Macedo and Chahad (1988) present evidence for the state of Sao Paulo and the city of Santo Andre.

8 Mitigati11g the Socilll Costs of Atljustme11t Programs in lAtiPI America: l51ues atl Policit•

budgets of private charities that no longer play a major role in social assistance. It is reasonable to assume that they also suffered, as they either depend on private donations that are likely to follow the economic cycle or on government grants that were curtailed.

Bolivia underwent one of the region's most successful stabilization programs. The program, adopted in 1985, contained various measures that sought to mitigate the social impact of adjustment. Initially, as described by Romero (1988), some forms of direct subsidy were adopted, in the form of distribution of food and medicines and direct employment by the public sector. This approach failed because of administrative problems and because the government could not get the support of international donors who are fundamental for Bolivia.

In December 1986 a new program was set up: the Social Emergency Fund that was attached directly to the office of the President. The purpose of the fund was to act as an intermediary for foreign resources. Domestic participation was only 20 percent. Four areas were selected as priorities: economic infrastructure, social infrastructure, social assistance, and support to production. The overall objective was to generate employment and mitigate social problems by means of small-scale projects to be developed by private organizations at the community level.

An evaluation made by Romero (1988) shows reasonable results in terms of jobs created and projects started in the areas covered by the fund. He also found problems: needs exceeded available resources; the skills required for the administration of projects were limited; there were attempts to extend the fund's activities to large-scale projects; and political pressures to distort the program em~rged in 1988 as the country approached a new presidential election. ·

Even if one assumes that the fund was successful its lessons are limited for other countries. It is a small-scale emergency program designed for a very poor and small country that has a primitive economy and counts on international support that was forthcoming, not only because of Bolivia's dire economic state, but also because of the government's commitment to attack the drug problem. For a modem region such as Sao Paulo, it would not help as much, but for a developing region such as the Brazilian Northeast it may offer some useful lessons. The emergency programs designed for northeast Brazil, following recurrent droughts, have had difficulty reaching the poor, particularly because they are carried out by traditional bureaucracies under the influence of local pressure groups. From what we have learned, the Bolivian fund was more successful in- this respect because it relied on private organizations at the community level.

Among the Latin American countries, Chile is one of the few countries with an old tradition in social policy. At the same time, it is also one of the few that has consistently adopted stabilization and adjustment policies and introduced major reforms in its social policy. Social policy dates back to the 1920s, and around 1970 the country was one of the region's leaders in social expenditure per capita. Much like the rest of the region, however, there was not a marked concern for effectiveness, efficiency, and equity and by the 1980s the system was showing signs of strain.

Mitigating 1M Sodlll Costs of Adjustment Pnlgi'IIIJfts in Latin A1111rial: Jssws arul Policia 9

During the Pinochet years, various aspects of the social policies were reformed, sometimes radically, as was the case in the social security system, which was transfonned into a system of pension funds managed by the private sector. The country also moved in the direction of targeting social expenditures, among other ·changes. The evaluation that these reforms receive from Chilean experts is often impaired by political passion. It is common to find both strong acclaim and criticism. A recent evaluation by Matte (1988) from the staff of the Secretary of Development and Social Assistance of the Chilean government argues that a concern for targeting and efficiency in the late 1970s made it possible to improve various social indicators even though Chile experienced a deep recession in 1982 and 1983.

Critics of the Chilean government insist, however, that the country distorted the concept of targeting. It did this, they say, by using targeting to concentrate resources on actions that would have a strong impact on specific indicators, such as infant mortality indices, that could bring immediate results for the sake of political gain.

Notwithstanding these quarrels, there is a point of agreement that seems to have resisted the most passionate arguments. Contrary to most Latin American countries, Chile consistently and effectively undertook a program of stabilization and adjustment in the early 1980s and adopted reforms that other countries have persistently procrastinated about, among them the revamping of government finances, the opening up of its economy, and the privatization of public enterprises. The country did pay a price for undertaking this course of action in the form of a recession; but in the end it recovered successfully from it. The civilian government that won the election in 1989 vowed not to revert the basic direction of the economic reforms, although it said it would review some of the social policies.

Although this section only briefly covered three cases, they offer useful lessons. Except in the case of Chile, which for decades have been ahead in terms of social policies, the efforts toward compensatory measures have been fragmented and rudimentary and far from genuinely and reasonably compensating for the impact of the crisis. In general, Latin America is in the very first steps of the process of establishing safety nets for social problems that strike an urban society that is subject to open unemployment.

Moreover, as is the case of Brazil, the recession puts additional burdens on a traditional system of social services that is already in decay because of the entitlement-resource gap. Thus, what is needed in the area of social policy is an overall revamping of these traditional systems, together with the establishment of safety nets for times of recession.

With respect to the mechanism that triggers the adoption of compensatory social policies, in both Brazil and Bolivia it was the worsening of unemployment, or its likelihood, that led to the adoption of countervailing measures. In other words, it seems that crises trigger policies in the same way a disease causes a person to seek treatment. This lesson is not new, as one recalls the depression of the 1930s and the social policy reforms brought about in the United States under the New Deal. Thus, those who argue for social policy reform in Latin America will find that what they want is less likely to fall on deaf ears when unemployment increases, or is likely to increase.

10 Mitigating tlw Socid Costs of Adjustment Programs i1l LAtin America: Issues and Policie•

Moreover, if a change occurs in this manner-such as the adoption of unemployment compensation in Brazil in 1986-in all likelihood it will remain after the crisis is over or until the perspective of higher unemployment vanishes. Emergency programs, such as food distribution schemes, are likely to disappear together with the pressure that brought them in, unless they are also well grounded by their own effectiveness, such as the "varejOes" in Sio Paulo.

In any case, it is important to have a menu of alternatives policy reforms. In Latin America the process of economic adjustment remains in its initial stages. Many countries continue to face recessions or are frightened by their likelihood. As democracy gains ground, the politicians are having a new chance to raise their banners. Thus, one cannot complain that opportunity is lacking. It is worth revisiting the discussion to review some of the options available to those interested in economic adjustment-cum-social policy reforms. ·

UNICEF and World Bank Approaches: A Comparison

Internationally, UNICEF pioneered the discussion of the social costs of adjustment in developing countries. From an intellectual point of view, its most important influence came from a set of studies it sponsored and published in the book, Adjustment with a Human Face, edited by three UNICEF staff members, Cornia, Jolly, and Stewart (1987). Before that, a collection of studies had been published in World Development (1984). ·

Adjustment with a Human Face comes in two volumes. The first volume reviews the social costs of adjustment and offers suggestions on social and economic policy measures setting the basis of what is called the UNICEF approach. The second volume is a series of country case studies.

Both volumes have been criticized in the literature, but before discussing points of agreement and dispute, it is necessary to clarify what is meant by the. -pNICEF approach. To present the characteristics of the UNICEY,or hum~ face, approach I will make use of a paper written by Jolly (1988). H~ompares UNICEF's approach with the orthodox viewpoint-a com rison reproduced in table 2. For later reference, it is added to the view f the World Bank's approach.

Comparing UNICEF's view with the orthodox one, the greatest difference is that the latter presses for monetary and fiscal measures that

. restrain aggregate demand in order to accomplish equilibrium in the economy both from domestic and external points of view. The orthodox approach is not concerned with growth or with the social impact of adjustment policies. The UNICEF approach instead adopts a radically different view, even refuting that inflation should be an overriding priority and then recommending expansionary demand policies.

Mitigating tM Social Costs of Adjust'lfiCit Prog111111s in lAtin Amtriaa: Issuts and Policia 11

Table 2 A Comparison of Orthodox, Human Face, and World Bank Approaches to Adjustment

Orthodox approach: Human face approttch World Bttnk approach

Objectifies • Reduce Inflation • Accelerate growth. with an • Reduce Inflation

emphula on growth of produc-lion and lnc:omea among low-Income groups; cmcem with Inflation, but Inflation not an overriding priority.

• Reetabllah • Reestabllah the equilibrium • Reesta bl!ah equilibrium equl1ibrium In the In the balance of payments. In the CUJTellt account balance of payments balance of payments.

• Promote growth. • Protect the poor and vulnerable. • Restore suataillable

growth. • Equity arvl/ ac

poverty reduction. Policies • Restrictive • More explll&ionary • Stabilization poUdes that

"demand Hdemand management" seek to Improve the balance management• polides (fiac:aJ.. monetary between aggregate supply pdides (flacal, rate, wage); more active and demand (usually monetary rate, search for foreign exchange demand management wage). required-related to that by means of fiscal

management policy. and m011etary lnatrwnents and devaluation).

• Untargeted "supply expan- • Targeted (on the poor) Structural adjuatmen t slm•polides "supply expalllim• polides polides that aeek to (exchange rate, (exchange rate, Interest restore suatailla ble Interest rate. rate, production prices). growth (usually producer prices). liberalization

of domestic product marketa, trade and exchange liberalization. and lnatitutional reforma such as privatiza lion).

• No specific policy. • Support for small-Kale • Poverty reduction measures production urban informal focusing on target groups sector, small farmers, women, defined by poverty and/or and landless. vulnerability criteria

(usually a review of government expenditures and taxes following poverty and/ or equity criteria: for lnatance, when making cuta In expenditures, a set designed for the target groups Is preeerved or even expanded).

• Generalized • No specific policy. • Other meaaurea Include: "Institutional Investment In human reform• poUdea capital (particularly toward through the rehabilitation privatization and of primary health export-orientation. and education. and

targeted food-• No apedfic policy. • Restructuring of social Interventions), Increasing

expenditure toward low-cost, the access of the poor to buic education, primary productive aueta, raising health care, and other basic the retuma on the· auets of mass-coverage services. the poor, promoting

remunerative wage-

12 Mitigating tire Social Costs of Adjustment Programs in Latin America: Issues ad Policies

Orthodox ap,oach:

•

• • •

No apecific policy

Short duration

Monitor primarily financial targeta. Polides genenlly delll{p\ed only by Ministry of Finance. IMP/World Bank.

HumJln face approach

• AdditiONl focuaed support far thole aHec:t.ed by adjuatmenL - Publk worb employment programa. ' - Food stampHupplementuy feedJns-nutrition 111ppart programs.

• Longer duration (5-tO yeara). (1-'J yeara)

• Also monitor ecx&\01111c tpoWth and hWIWI conditions

• Policy de&ign alao by Ministry oE Planning. Health and Education, and R.O/ UNICEF IUNDP /IF AD/etc.

World Bank approach

employment and empowering the poor In aodety).

• Medium to longer dura~on G-tO yeara).

• Alao monitor growth and hWIWI cxmdltionl.

• polides desisned by the varl.oua concemed Ministries and Agendes: World Balik and other International agencies aleo Involved.

Source: First two columns reproduced from Jolly (1988) to facilitate comparisons; third column represents the author's view of the World Bank policies as described by various documents, particularly thase dealing with "Social Dimensions of Adjustment" (SDA) in Africa.

The criticisms directed at the UNICEF approach are two fold. Opponents argue that the empirical evidence assembled in volume II is not sufficiently clear, leaving many doubts about the impact of the recession on children (Behrman 1990). Others criticise the policies proposed by the authors of volume one (Pfeffermann 1990). I will discuss these criticisms separately. With respect to the studies contained in volume II, I cannot respond for the other authors. As to the work I have done with Chahad, I have already referred to it in the previous section. Though we did face methodological and data difficulties in the three case studies, we maintain that the conclusions are sound. Wh~yer wants to dispute them must present alternative and more convincing explanations for the deterioration of various social indicators during the recession observed in Brazil in the early 1980s.

As to the criticism of the policy recommendations of volume I of Adjustment with a Human Face I have to admit that my interests lie mainly with the Brazilian economy and that I am not familiar with African countries and other primitive economies where UNICEFs work is concentrated. I believe that the expansionary policies proposed by UNICEF are not feasible, though of course I share the overall concern for adjustment with a human face. Considering the inflation rates reached in Brazil recently (85 percent per month in March 1990), inflation is indeed an overriding problem and should be fought with orthodox policies. However these policies should be undertaken together with measures to resume economic growth and alleviate and shorten the recession, and with compensatory policies to mitigate the social impact of the adjustment.

Within the orthodox approach such concerns are neglected first because income distribution is often only considered as an ethical question. Another reason is that the orthodox approach, often pressed by international institutions, particularly the International Monetary Fund (IMF), usually

Mitigating 1M Social Costs of Adjustmml Progmms in ~tin AIIWriC&I: lssws .arul Policies 13

avoids dealing with social matters, stating that these are issues of domestic concern only. By neglecting such matters, however, these institutions end up inducing the local authorities, who sign agreements with them, to ignore the social implications of the policies they adopt.

Perhaps an additional allocation of government resources for social programs during the adjustment period is not feasible. Adjustment programs should, however, routinely review social policies, taking into account the whole structure of government income and expenditures. The latter would be redefined by targeting them to the poorest groups. Essential and targeted expenditures should be defined as the core expenditures, and eventually enlarged, and should act as a constraint on the restructuring of government expenditures as a whole. This total would then be subject to the requirements of the adjustment program. Moreover, it would also be necessary to redefine the tax structure to raise more resources and to make it progressive and more dependent on direct taxes.

This point of view, which combines the targeting of expenditures with a restructuring of the tax system, is well grounded in the Brazilian experience. It shows that government expenditures generally benefit the middle class and the rich while the poor suffer from a higher rate of taxation. (see tables 3 and 4). Although the data on table 3 is from 1975, it reflects a structural problem that has not been corrected.

Table 3 Brazil-Tax Burden by Income Class -1975

Monthly Dispost~ble Income (11)

0 - 1 1 - 2 2 - 5 5 - 10

10 - 15 15 - 20 20 - 30 30 - 40 40- 50 50- 75 75 - 100

+ 100

Source: Eris, Campos Eris, I<adota and Zagha (1983)

Metlit~n

Rt~te of Tt~.r ~) 36.0 32.3 25.5 24.5 22.7 22.7 22.3 21.8 20.5 19.2 17.5 13.8

Notes:(a) Measured in units of annual average of minimum wage in 1975 (Cr$480.8). (b) These estimates are based on the assumptions that profit and sales taxes are transferred to prices; personal income taxes are not transferred; and sale and wage taxes are semi-transferred.

14 Mitigatixg the Social Costs uf Atlj~ntmext Programs in Latin America: lssua afttl Policil•

Table 4 Brazil-Probable Distribution of Social Benefits, by Income Class of Likely Recipients, 1986

Monthly minifflaun wt~ge

per ltouseholtf ,.e,.ber "I >2

1-2 1/2-1

1/4-1/2 <1/4

Total

Source: World Bank (1988)

Percent of tott~l popul11tion

16 18 24 22 19 99(~

Percent of tot11l popullltio•

34 22 24 14 6

100

Note: (a) A figure of 2 means that the wage per household member is twice the minimum wage. Similarly 1 I 4 means that wage is a quarter of minimum wage. (b) Does not add to 100 due to rounding errors.

In developing countries adjustment policies cannot be undertaken independently of a concern for the resumption of economic growth. Mainly because stabilization brings unpleasant effects to an economy that is not yet a strong, one must take immediate steps to recover and strengthen the patient. Thus, to the stabilization program one must add structural reforms to overcome domestic and external handicaps to growth.

This course of action has points in common with the World Bank approach. Some orthodox measures are unavoidable and their postponement only extends the crisis and ends up hampering the resumption of growth. The proposed adjustment is also growth~riented, and the World Bank has increasingly recognized the social dimensions of adjustment. It should be noted that my view concerning the World Bank's approach is strictly a personal one. Besides, it seems that it is essentially an African approach, as the World Bank has been reluctant to extend the social dimensions of adjustment facility to Latin America.

More recently, because of the experience I accumulated in the analysis of these issues, I began to develop an approach that goes beyond the one sketched above. I will discuss it in the following section.

Expansion of Entitlement Scarcity of Resources and the Design of Social Policies 2

The starting point is the concept of a soft budget constraint developed . by Hungarian economist Janos Kornai (1979). He deals with problems of

ineffectiveness and inefficiency of the socialist countries' enterprises and governments, stressing that they escape from the capitalist system's paradigm. In this system, production is also determined by the demand side, because the budget constraints are tight. In the socialist system, given the organization of the political and economic system, the budget

2 The analysis of this section is extended as part of a research project undertaken by the Fernand Braudel Institute of World Economics with support from the Ford Foundation.

Mitigating 1M Social Costs of Adjustment Prognuns in lAtin Ameria: Jssws and Policia 15

constraints on the demand side are soft; when this occurs, demand remains undetermined and the productive activity is then limited only by the resources; that is, it becomes resource constrained. 'The pressure of demand on resources forces allocation to become ineffective and inefficient. Scarcity and queues arise and production itself becomes inefficient. Without tight budget constraints, resource allocation becomes determined by bureaucratic criteria.

The concept of soft budget constraints can also be applied to social sectors where there has been an excessive growth of entitlements and services offered either gratuitously or subsidized by the state (such as education, health, and social security). Political pressure together with a Jack of concern for the responsible management of public finances has led to an enormous expansion of entitlements. In Brazil these are called social rights. Through political-administrative decisions increasing portions of the population became entitled to free or subsidized services offered by the state. Unfortunately there was not a commensurate increase in resources. Thus, demand expanded but without an adequate expansion in supply. When the supply is limited by the resources allocated to services it becomes resource constrained. Demand is greater than supply and the services deteriorate.

The gap between the faster growth of the entitlements relative to resources leads to several consequences. From the macroeconomic point of view the gap between entitlements and resources constantly pressures public expenditures. It is one of the reasons for higher government deficits and Latin America's chronic inflationary problems. In addition, the increased allocation of resources reduces the portion of resources available for private and public investment, such as infrastructure, which likewise deteriorate. Government expenditures are thus carried out in an ineffective and inefficient way-besides failing equity criteria. The results are systems that deteriorate, and deficits that add to inflation and slackened economic growth.

From the microeconomic point of view, the gap leads to a deterioration in the quality of services, which expresses itself in many ways. It is revealed not only by elements that show that the demand is not being met (as is happening in Brazil when people are dying in queues for Jack of medical assistance), but also by other indicators that will be discussed later in this section. From an administrative point of view, the situation often becomes chaotic. Public servants' wages are low and there is little chance of improving human resources or of purchasing modem equipment.

This view of deteriorating public services as a result of soft budget constraints that lead to macro- and microeconomic distortions, although useful for analytic purposes, does not solve the problem. The solution is found in the literature on social policy. This is the concept of targeting, according to which the government's social expenditures should be targeted to poorer groups of the population.

The concept of targeting, however, comes mainly from concern with equity because it begins by locating widespread social injustice. This paper attempts to support targeting on grounds of equity and efficiency . The basic point is that the adoption of targeting would lead to restrictions on the

16 Mitigati"g tire SocW Costs of Adjustme11t Programs i" uti" America: Issua 111111 Polic~•

demand side, thus changing the budget constraint from soft to tight, by defining the population entitled to the social services. This would reduce the pressure of demand on the resources and open the way to improve the quality of the assistance now provided and reverse the former trend. From a macroeconomic point of view, there would be favorable repercussions on inflation and growth rates, following a reduction in the government's deficit and an improvement in the allocation of resources. It is also important to emphasize that with this approach the distortions of social policies, as revealed by worsening social indicators, are not only an effect of chronic disequilibria that require adjustment policies, they also cause these disequilibria by their role in processes that lead to higher inflation and slackened growth.

There is evidence to support my assertion of a widening gap between entitlements and resources,· and consequently a deterioration in public services. This evidence covers aspects of the education, health, and social security systems in Brazil.

Education

Until the mid-sixties, the government had committed itself to free and universal education up to the first four years of schooling. But resources were limited and only rarely reached the rural areas. Since the urbanization rate in Brazil was low at the time and the poorest groups were concentrated in the rural sector, they received almost no assistance. And only a few model schools provided education beyond the first four years.

Then, due to the political pressure of urbanization, the government decided to enlarge its commitment to universal schooling up to the secondary level. Until then, to attend the public schools at both these levels (primary and secondary) a yery severe examination was required. Only a few public schools were equipped with high quality teaching staff to offer education beyond the primary level. The system was good but it was very limited and only offered to an elite.

With the open-door policy inaugurated in the mid-1960s and with the great migration to the urban areas, the demand for schooling became very strong. The admission exam was eliminated and the government attempted to enroll all those who sought schooling. The admission examination had meant a budget constraint; when it was eliminated, the system became resource constrained.

Although the adopted solution expanded the coverage of the public schools, it also led to a degeneration of the system by eliminating the restrictions concerning demand without a sustainable expansion in the available resources. Chart 1 presents a comparison of the number of students attending the primary and secondary public schools in the state of Sao Paulo and the resources received by its Secretary of Education. Notice that both series are indices with a base of 1960 = 100. This is not to imply that in 1960 resources matched the needs of the students enrolled. The chart focuses mainly on the differences between the rates in growth of the two series.

Mitig11tmg 1M Social Costs of Mjustrnerd Progn~ms in lAtin Americ.IJ: Issws 11114 Poli&ia 17

0 0 .... n

0 ID 0\ ....

>< Cl)

"C c::

H

Chart 1. Sio Paulo School System - Primary and Secondary Levels (Enrollment ~nd expenditure in eduCiltion 1960-89)

<100

300

200

100

0 1960 196$ 1970 197S 1910 191S

----- Emollmmt - ~-

In the beginning resources grew at a faster pace than the increase in the number of students, but after the mid-1970s the latter continued to grow while the amount of resources started to decline. Thus, what is referred to as a widening gap is clear only after the mid-1970s. What is not so clear is whether the previous growth in resources could have been maintained or whether it was deliberately curtailed. Very likely it was the result of a crowding out of the education expenses by the increasing burden of the state's domestic and foreign debt that expanded sharply from the mid-1970son.

To show that this gap led to a deterioration in quality, Chart 2 presents the percentage of students coming from public schools and approved in the admission tests of the University of Sao Paulo, the most renowned university in Brazil. The percentage of students who applied for admission and took the tests is also shown. Both lines show a falling trend, as well as a widening gap between those who applied and those who were accepted.

1f90

Chart 2. Admission Tests at University of Sio Paulo (Percentage of students from 2nd grade public schools)

ss

so

45

40

35

30

25

20

15~~~~~?r~~~rM~TT~~~~~

1975 1977 1979 1981 1983 1985 1987 1989

II Applicants Soun:e: FUVEST • Approved

1be targeting of educational ex~ditures in the primary and secondary schools would be particularly troublesome because it would face the risk of excluding vulnerable groups from the system. By looking at the history of developed countries, particularly Europe, it is worth noting that it was the expansion of access in general that brought the poor to public education. In this case then the problem might be to expand resources again but without neglecting the tightening budget constraints. Thus, the government could, concentrate on primary education and/or adopt less sbict fonns of targeting, such as cost recovery schemes applied to those who can bear the costs. Moreover, given that the government ,provides free college education, which to a large extent does not reach the poor, it could charje tuition fees to the rich and free up resources for the poor. These suggestions would be

, tantamount to targeting by type of. program with the government concentrating on financing services with a strong public good component.

Health and Social Security

The health and social security systems i~ Brazil are part of SINP AS (the National System of Welfare and Social Security), which has one of the largest budgets in the country with a total volume of resources of

Mitig11ting Ute Socilll Costs of Adjustment Progr~~ms in Ultin Americll: Jssws 11rul Policies 19

approximately 5 percent of GDP.3 The system provides pensions and medical assistance directly to the public hospitals or through payments to private and NGO networks.

SINP AS began in the 1930s. Effectively only taxpayers were beneficiaries of the system in the initial stages. At that time demand and resources did not suffer chronic unbalances. Afterward, particularly from the mid-1970s, political pressures and ethical considerations led the government to seek to universalize the clientele, but without expanding the resources allocated to the system. In 1974 a monthly life pension was provided to the aged and handicapped, irrespective of whether they had paid into the system. At the same time national health was provided to the entire population regardless of their tax status. Initially this began only for emergency cases, but today the assistance is generalized.

At the end of the 1970s the system's lack of resources became evident. After successive deficits the government began to increase social security taxes, and even created new taxes in the 1980s, such as a sales tax and a profit tax. This did not solve the problem. Demand increased in such a way that services began to deteriorate. As the deficits are looming large again new proposals have recently emerged to increase the sales and profit taxes. The value of benefits such as retirement allowances, pensions, and even the payments made to private hospitals, have been progressively reduced in real value. In the area of health the government pressed for reducing the level of stay in hospitals, as well as to limit the cost of medical assistance for each disease or medical procedure.

In the area of health and social security covered by the federal system the expansion of entitlements is widely open to criticism. Brazil is one of a half-dozen countries in the world that adopted retirement by length of service, sometimes allowing retirement at ages as low as 45. Expensive surgical procedures and medical treatments are provided to the middle class and the rich without cost recovery. In the area of health care, the middle class and the rich seek better hospitals and doctors but, whenever possible, they find ways to transfer to the social security system for at least part of the bill. There are many other examples of unrestricted entitlements and mistargeting of expenditures; however, they will not be presented here. Chart 3 shows the system's ratio of contributors to beneficiaries. The latter is defined as those receiving pensions only. The ratio increased in the 1930s as the institutional coverage of the system was expanding and as it was adding more active workers than pensioners. Thereafter, the fall was continuous. At the end of the period covered by the chart there were roughly only two contributors to sustain one beneficiary. As table 5 shows, by 1981 Brazil's ratio was closer to those observed in France and Germany, although Brazil has a younger population and a much lower GOP per capita.

3 See Macedo (1982) for an appraisal of the Brazilian health and social security systems.

20 Mitig•tixg the Socild Costs of AtljJUtmerd Progr411ns in lAtin AIIID'ial: Issws tm4 Policies

Chart 3. Brazil Social Security System (Contributors/beneficiaries ratio - 1923-1988)

~,----------------------------------38 36 34 32 30 28 26 24 22 20 18 16 14 12 10

8 6 4 2 O~T-~~~-r-r~r~~~~~~-r~~ 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

Table 5: Ratio Beneficiaries/Contributors - Selected Countries - 1981

Countries

Brazil United States Japan France (a) Germany (b)

Ratio

1:2.74 1:3.23 1:5.52 1:2.h7 1:1.77

Soun:e: International Labour Review, May/June, 1983 (as quoted by Oliveira, Cabral, BaltrAo, and Brito (1990) (a) 1980; (b) 1979

Chart 4 shows an estimate of the growth of entitlements (number of , persons entitled to some form of benefit) and expenditures from 1971 to 1988.

In principle, the whole population is now entitled, as the system moved to generalized coverage. The estimates of the number of entitled persons started from a number based on the workers in the fonnal market (and their dependents) in the early 1970s, then took into account periods in which the clientele was sharply enlarged (such as in 1974, due to the old age and handicapped pensions then created), ana proceeded to the final generalization of the system following the Constitution of 1988. Oose to 80 percent of the population is now eligible for entitlements.

Mitigatirtg 1M Social Costs of AtljustmD~t .Prognmrs irt lAtin Amerial: Issucs art4 Polida 21

Chart 4. Admission Tests at University of Sao Paulo (Entitlements and total real expenditures 1971-88)

360~--------------------------------, 350 340 330 320 310 300 290 280 270 260 250 240 230 220 210 200 190 180 170 160 150 140 130 120 110 100~~-,r-~~--r-~~--r-~~--r-~

1971 1974 1977 1980 1983 1986 1989

m- Expenditures

• Entitlements

This trend could be compared to what was shown in chart 1 with regard to education expenditures: the gap between resources and entitlements becomes evident only after the late 1970s. In fact, although the estimates of entitlements are very rough, as long as they were increasing-and they were-a widening gap would appear at the end of the series.

-.. As to the indicators of the deterioration of the system's quality, evidence was not available in the form of data. However, it would only be necessary to show what is obvious for Brazilians-that pensions have been falling, and cannot be relied on in the future, and that health assistance is now so precarious that in general those who have resources avoid the social security hospitals. These are stylized facts that the news media focus on;

, concerning, for example, the cases of people who die due to lack of medical assistance, sometimes in the waiting lines of hospitals and medical centers. A major difficulty in this area is that the government does not provide data on the decay of the system, since this brings about further political problems that it would rather avoid.

As in the case of education, the form of targeting in health programs should go beyond strict targeting by income and the government should enforce selective cost recovery schemes concentrating on programs that are closer to needs of the public. This is an argument for expanded preventive health care, as opposed to expensive curative hospital services that are

allegedly accessible to all, but in practice are usually limited to a privileged few. Thus, in the case of health and social security there is a need to limit entitlements and the value of pensions and to expand the role of the private sector in the provision and financing of services.

Concluding remarks

This paper showed that to understand the reforms and to propose further changes in social policy in Latin America, one has to take into account the current stage of the economic, social, and political development of each country under study. As a whole, the region seems to be going through stages that the industrialized countries went through some decades ago. Under the pressure of economic crises that had a strong social impact in urban and often semi-industrialized areas several Latin American countries have started to adopt some safety nets to cope with the problem. Since the various countries in the region are also at very different stages of development, it is not surprising that the measures undertaken thus far also fit their local conditions. Thus, Bolivia opted for a low-cost grassroots emergency program while Brazil moved into unemployment compensation for workers in the formal labor markets.

While adopting these measures, most countries have looked primarily at the social impact of the recessions. A lot less was done to get a better understanding of the issues involved in order to formulate effective, efficient, and equitable social policies.

The intellectual debate has advanced more rapidly than policy reforms, and there are useful discussions on these issues in the literature. The evaluation given here recognizes the need for economic adjustment, but also the existence of important social costs. Measures to mitigate these costs must be undertaken together with adjustment policies. This evaluation thus coincides with the views of those authors and institutions who argue for a reform of social policies that focus on the targeting of government social expenditures and the restructuring of the tax system. However, detailed design of social policy reform must take into account the specific characteristics of each country, particularly each country's stage of development.

After looking at the social impact of the Brazilian recession in the early 1980s, I have realized that the worsening of some social indicators cannot only be seen as the social costs of adjustment. At the root of this deterioration are social policy distortions that cause the need for adjustment and thus, in a vicious circle, aggravate these distortions. A major distortion of social policy is the continued expansion of entitlements to social services without a corresponding expansion in resources. As demand is not constrained and resources are limited, this causes a deterioration in the quality of the social services provided by the government. In the process, government deficits are expanded and resources are misallocated, compounding the need for adjustment policies. This brings further deterioration to the bureaucratic structures that provide the services, thus worsening their ability to cope with a demand further enlarged by the same adjustment policies.

Mitigating the Social Costs of Adjustment Progr~~ms in lAtin Ameriaa: Issues and Policies 23

While targeting of social expenditures to the poor provides a way out of this circle the approach described here makes the case for stronger targeting that can be sustained in a wider framework. This approach also takes into account effectiveness and efficiency criteria, which are often neglected when the case for targeting is argued. Moreover, it shows the macroeconomic implications of the widening gap between entitlements and resources, and reinforces the link between adjustment and social policy reform.

24 Mitigating the Social Costs of Adjustment Programs in lAtin America: Issws and Policies

References

Behrman, Jere R. 1990. "Interactions among Human Resources and Poverty: What We Know and What We Do Not Know." Washington, D.C.: World Bank, PHR Department. Unpublished.

Cornia, Giovani Andrea, Richard Jolly, and Frances Stewart, eds. 1987. Adjustment with" Hum~~n FllCe (A UNICEF Study). New York: Oxford University Press.

ECLA (Economic Commission for Latin America). 1989. "Balance Preliminary de Ia Economfa de America Latina y el Caribe - 1989. • Notas sobre Ill Economw Y el DestJ"ollo No. 485/6 (December).

Eris, I., C. C. Campos Eris, D. Kadota, and N. Zagha. 1983 • A Distribuic;;lo de Renda e o Sistema Tributario no Brasil. • In Campos Eris, C.C., et al., Financ;;as pQblicas. Slo Paulo: FIPE - Pioneira.

Jolly, Richard. 1988. "Poverty and Adjustment in the 1990." In Strengthening the Poor: WhtJt HtJve We Learned? Overseas Development Council, Policy and Perspectives Series, No.lO. U.K.

Kornai, J. 1979. "Resource-Constrained versus Demand-Constrained Systems." EconometriCtJ 47:4 (July):801-19.

Macedo, Roberto. 1982. Previdencia Social: Rumo as Crises Futuras. Proceedings of the Annual Meeting of ANPEC (National Association of Centers of Graduate Instruction in Economics). Rio de Janeiro: ANPEC.

... . 1984. "Brazilian Children and the Economic Crisis: Evidence ----

from the State of Slo Paulo." World Development, No. 3.

____ . 1987. "Brazilian Children and the Economic Crisis: The Experience of the State of Sao Paulo Revisited." In Giovani Andrea Cornia, Richard Jolly, and Frances Stewart, eds., Adjustment with tJ Human Face (A UNICEF Study). New York: Oxford University Press.

Macedo, Roberto, and Jose P .Z. Chahad. 1988. "Ajuste Economico e lmpacto Social no Brasil: 1980-87." In Jose P .Z. Chahad and Ruben Cervini, eds., Crise e Infancia no Brasil. Slo Paulo: IPE-USP.

Matte, Patricia. 1988. "Focalizaci6n del Gasto Social, Ia Experiencia de Chile." Paper read at the "Seminario de Alto Nivel: Como Recuperar el Progreso Social en America Latina." UN-ECLA, Santiago. Processed.

Oliveira, Francisco E.B., Hilda M. Cabral, Kaizal Beltrlo, and Sheila J. Brito. 1990. "Metodologia de Proj~lo dos Gastos Previdenciarios e Sociais." Estudos sobre Economia do Setor Publico 4 (March), IPEA/ILPES.

Mitig11ting the SociAl Costs of Adjustment Programs in lAtin America: Jssws and Policia 25

Peliano, Anna Maria T.M. 1988" Programas Alimentares e Nutricionais no Contexto da Reces~o Economica," In Jose P :z. Chahad and Rubens Cervini, eds., Crise e Inftincill no Brasil. Slo Paulo: IPE-USP.

Pezzin, Liliana. 1986. Crimirudidade Urbana e Crise Econ6mica: 0 CIISo tle Sao Paulo. Slo Paulo: IPE-USP.

Pfeffermann, Guy. 1990. "Poverty Alleviation." In Gerald M. Meyer, ed., The New Political Economy. San Francisco: Institute for Contemporary Studies.

Romero, Fernando. 1988. "Fondo Social de Emergencia-Bolivia." Paper read at the "Seminario de Alto Nivel: Como Recuperar el Progreso Social en America Latina", Santiago. UN-ECLA. Processed.

SimOes, Celso Cardoso. 1989. "Novas Estimativas da Mortalidade Infantil: 1980/87.".· In IBGE-UNICEF, Perfil Estat{stico de Crian~ e M1es no Brasil. Rio de Janeiro.

Viana, Solon M., Andre C. Medici and Sergio F. Piola. 1988 "Programas de Saude Durante a Reces~o." In Jose P2. Chahad and Ruben Cervini, eds., Crise e Infancill no Brasil. Slo Paulo: IPE-USP.

World Bank. 1988. "Brazil- Public Spending on Social Proqrams: Issues and Options." Research Report. Washington, D.C.: World Bank.

Social Policy During Adjustment: Th~ Poor and Beyond

Vanessa Cartaya and Gustavo Marquez

26

Abstract

Severe social costs accompanied the 1989 structural adjustment in Venezuela. Real per capita expenditures on health and education decreased by 24 percent and 16 percent, respectively. Food prices increased at an annual 130 percent and average formal sector wages decreased by 40 percent. The public response to these events was violent. Riots broke out with the initiation of the price increases. This paper presents the government's policy reaction to these social ills, and examines the long­term need for mitigating the social costs of adjustment.

Following the February riots of 1989, the government implemented a poverty program that comprised: a minimum wage increase, unemployment insurance, and a variety of employment training, health, and nutrition programs. As the authors state, given the size of the problem, these measures were insufficient; yet this public policy of poverty alleviation was a significant improvement from past efforts, and introduced new concept of social policy. The reexamination of social policy issues in Venezuela points to the following reforms: strengthening the technical capacity of social sectors, and decentralizing. The authors stress the need to consider social and economic policies in an integrated framework.

~ ...

2 SociAL POLICY DURING ADJUSTMENT: THE

POOR AND BEYOND

Vanessa Cartaya and Gustavo Marquez

Structural adjustment is supposed to lead to an improvement in social conditions, mainly through the incorporation of the poor as producers and consumers in the framework of a growing economy adequately integrated to the world market. Policy reform helps to achieve this objective through the establishment of an economic order based on general free market principles that have operated successfully in today's developed economies. Nevertheless, structural adjustment seems to have strong adverse social consequences in the short run. Whether this perceived worsening of social conditions arises from the reversing of unsustainable economic trends, or from rigidities that retard resource mobilization should not cloud our vision about the reality of these social costs.

Governments and international lending agencies have reacted by adopting a social policy agenda, commonly known as mitigating the social costs of adjustment. In practice, however, social policy is becoming (a) secondary to economic policy, and (b) isolated from the grand design of development. In a sense, we are returning to the discredited trickle-down argument, where growth is supposed to solve the poverty problem, and social policy's fundamental role is to cushion the immediate and irreversible damage (malnutrition, infant mortality) that affect the most vulnerable groups of the population. ·

The mitigating the social costs of adjustment agenda has led the Venezuelan govemement to implement policies outside the traditional social services apparatus~n apparatus that is in complete disrepair and plagued by inefficiency and misallocation of resources. Given the potential of political conflict of a sweeping restructuring of social services, it is very tempting to present the mitigating the social costs of adjustment policies (essentially a set of transitory poverty alleviation measures) as a replacement for social policy. Thus, the urgently needed institutional and operational reforms of the health, education, and social security organizations are held back, while governments claim success at the development of a new social policy.

This new social policy emphasizes estimating who and how many the poor are, assessing available resources, and evaluating the cost of intervention. But as important as these considerations may be, they could

28 Latin America: Facing the Challenges of Adjustment and Growth

end up obscuring the ultimate objective of social policy-integrating the poor in economic progress. This objective can only be achieved to the extent that improvements in human capital accumulation are ·made possible by efficient and equitable social service organizations that serve not only the poor, but the population at large. Because these organizations produce mostly public goods, their development and functioning present peculiar problems that cannot be solved by a mechanistic application of free market economic principles.

Free market economic principles are an abstract name to describe a complex set of social institutions that allow growth and efficient use of existing resources. The widely held belief that economic liberalization, in and by itself, promotes social progress is a dangerous mistake. Social progress can be described as a process by which the quantity and quality of public goods expands, while at the same time their consumption becomes available to wider segments of the population. Because public goods tend to be under-produced under a free market system, successful economies have over time developed a set of social institutions that help to solve the wide variety of dilemma of the commons that this situation gives rise to. In contrast with the universal free market principles, social institutions that make societies successful in achieving the common good are, tailor-made for, and by, each society.

This paper hopes to reverse the order of current thinking by, first, emphasizing the ultimate social objectives, and second, by evaluating the soundness of the measures we are advocating in an attempt to arrive at these objectives. We emphasize the need for a more comprehensive social policy that, going beyond the poor, contributes to the creation of the human resources needed by an economic strategy of expansionary adjustment. As a consequence, we postulate that social policy must be evaluated not only on how successful it is at sheltering and cushioning the impact of adjustment on the poor, but also on how much it contributes to the institutional and organizational developments needed to ensure social progress.

Section .I is dedicated to a brief description of the effects of Venezuela's policy reform on the social situation. In Section II, we analyze the characteristics of poor families in Venezuela, in order to identify the changes that adjustment introduced in the characteristics and extension of poverty. In Section III, we go into some detail of the Venezuelan version of the 'mitigating the social cost of adjustment' agenda, calling attention to what we see as its successes, short-comings, and implementation difficulties. Section IV explores some of the conceptual and operational questions that a new, and more comprehensive, social policy agenda should address. Section V aims at some conclusions.

Adjustment and Social Costs: The Venezuelan Connection

In every country where adjustment policies have been adopted, we find a similar panorama of increased poverty (at least in the short run) both because employment availability is reduced, and because prices of basic commodities (mainly foodstuffs) increase. These two types of costs are the consequences and the objective of adjustment at the same time. In general, and Venezuela represents a good case in point, economies that go

Latin America: Facing the Cluzllenges of Adjustment and Growth 29

through an adjustment process do so because macroeconomic and sectorial disequilibria are of such magnitude that the risk of economic collapse is imminent. The evaluation of the social costs of policy reform becomes difficult both because one may be unduly burdening adjustment policies with consequences that do not arise from the policy itself, and because trend reversals in social indicators may be the result of budget constraints ignored by previous policies.

The social situation in Venezuela has been deteriorating for at least a decade. The building of a large complex of public enterprises in the mid­seventies created a distributional conflict within the fiscal budget between financing deficits of often inefficient public enterprises and the production and delivery of social services. The repetitious postponement of adjustment made for an unstable inflation and a long term deterioration of job quality, eroding real incomes and worsening income distribution (Marquez 1990). The brief period of growth between 1986 and 1988 accelerated inflation and worsened income distribution even more.

At the same time, the recurrent fiscal crises of the eighties resulted in a deterioration in the quality of social services. Even though Venezuela ranks fairly high in general social indicators among Latin American countries, the picture is not so encouraging when compared with countries of similar per capita GNP: High school enrollments are low, immunizations per child have been decreasing, and there are abundant symptoms of inadequacy and over-burdening in the public health system. In 1987, Venezuela ranked below Brazil, Panama, Uruguay, Cuba, and Chile in weight of infants at birth; and below Cuba, Chile, Trinidad-Tobago, Costa Rica, Argentina, and Panama in mortality rates of children less than five years old (Cartaya y Garda 1990).

The adjustment-cum-stabilization policy adopted in Venezuela at the beginning of 1989 under agreements with the International Monetary Fund (IMF) and the World Bank 1 encompassed five major measures: (a) elimination of price controls; (b) unification and devaluation· of the exchange rate; (c) increase in interest rates and liberalization of the financial market; (d) drastic reduction in the fiscal deficit, that included reductions in indirect subsidies to consumers and increases in public sector prices and tariffs; and (e) trade liberalization, including reductions in Quantitative Restrictions (QRs) and rationalization of the tariff system.

The most outstanding effects of this policy package were a deep recession and a jump in the price level, followed by a rapid stabilization of the real exchange rate, a reduction in inflation to levels below those of 1988, and the maintenance of positive real interest rates. By the end of 1989 the current account of the balance of payments (BOP) showed a surplus reversing deficits that had persisted since 1986. The fiscal accounts recorded an overall deficit below the target agreed with IMF. At the beginning of 1990 it could be said that the economy had been stabilized, though the costs in terms of job quality, growth, and real incomes had been huge.

1. For a more comprehensive account of the policy package see the paper by Hausmann in this Seminar.

30 lAtin America: Ftring the CluJllertges of Adjustment 11rul Gr0111tlt

Table 1. Venezuela- Sociallndicaton

1980 1984 1989

Health Infant mortality (per 1000 live births)

neo-natal 16.7 15.7 14.5 (d)

younger than 5 years 37.0 :n.o 29.5 (c)

Infrastructure and equipment

General beds (per 1000 peni0118) 3.0 2.7 2.5 (c)

Pediatric beds (per 1000 children under 10) 1.7 1.7 1.6 (c)

Immunizations (per child under 4)

Polio 1.4 1.0 0.7 (d)

Triple 0.3 0.3 0.3 (d)

Nutrition Caloric availability ( percent of RDA) 93.5 95.7 79.3 (a)

Low weight births (percent of total) n.a. 8.7 9.5 (c)

Education Uteracy rates (10-14 years old) 95.1 w.o 96.4 (a)

Desertion in elementary school 7.1 6.7 7.0 (c)

Proeecution (up to 6th grade) 59.0 58.0 60.0(c)

Income distribution

Lowest10'!1. 2.4 2.1 1.6(b)

Top10'!1. 26.4 29.4 31.9 (b)

Source: MArquez 1989h, AGROPLAN 1990, Cartaya y Garcfa 1990, OCEl vs. years. (a): 1990; (b) 1989; (c) 1988; (d) 1987

Table2. Venezuela-The economic impact of adjusbnent (percent)

1985 1987 1988 1989

Non-oil, private GNP growth 2.3 3.6 3.6 -10.5

Fiscal superavit (as percent of GNP) 3.3 -4.3 -8.1 -1.8

Current account BOP (MM USS) 3,617 -1,125 -4,692 792

Inflation 9.2 40.3 35.5 81.5

Unemployment (as percent of labor force) 12.1 8.5 6.9 9.7

Employment (annual growth rate)

•.. in the modem sector 2.3 9.8 7.2 -1.1

.. Jn the informal sector 8.7 -2.2 2.2 7.0

Nominal income (annual growth rate)

... in the modem sector 8.0 14.0 29.8 43.6

.. Jn the informal sector -1.8 22.7 32.4 17.3

Source: BCV and OCEI

Latin America: Facing the Chllllenges of Adjustment tmd Growth 31

The Impact of Disabsorption

Disabsorption is a consequence of fiscal deficit reduction, which shrinks aggregate demand and Gross National Product (GNP) growth. Though the consequences are multi-fold, the most visible impact of disabsorption is felt in the labor market as increased unemployment, falling real wages, reductions in modem sector employment, and expansion of low-quality, informal sector jobs. During 1989 informal sector employment grew rapidly, while modern sector employment fell, with private modern sector employment plummeting by 4.8 percent As a consequence, the share of the informal sector in total employment increased from 38.4 percent in 1988 to 40.2 percent in 1989. Because of the strong relative growth of informal sector employment, the unemployment rate grew modestly. Most of the adjustment in the labor market fell upon wages. Real incomes declined both in the modem and informal sectors. On average, modem sector real wages decreased by almost 40 percent, while informal sector real income diminished by 66.3 percent. Though averages can be very misleading in interpreting the evolution of real wages, the fact remains that they indicate a serious deterioration of real incomes throughout the economy.

The Impact of Price Inlation

In thelast decade, price inflation in Venezuela has been led by food prices, and 1989 was no exception to this: while the general Consumer Price Index (CPI) increased by 84 percent, the food, beverages, and tobacco component rose by 130 percent. Major factors that contributed to this result are: the importance of imports in food consumption and production; the presence of monopolistic distortions in the commercialization of food products; and the oligopolistic nature of the food industry. Because most food imports were previously permitted at the controlled 14.5 Bs./US$ exchange rate, the impact of exchange rate unification was felt the most in the production costs of the food industry. Given the larger .weight of foodstuffs in the consumption basket of the poor, a price jump, as the one registered in 1989, worsens income distribution and reduces real income of the poor (see Marquez 1990).

The Impact of Deficit Reduction

The effects of fiscal deficit reduction on the poorer segments of the population depends on the structure of net transfers that families of different income levels receive. Escobar (1990) shows that in Venezuela the poorer segments of the population receive positive net transfers from the public sector, mainly through education and health expenditures. Because the domestic tax structure is dominated by indirect consumption taxes, the poor-who consume a larger fraction of their income-tend to pay more taxes as a proportion of their income. This regressive structure of taxation is more than compensated for by education and health services publicly produced and delivered free-of-charge to low income households. Both inflation and reductions in education and health expenditures tend to reduce poorer families welfare even in the short tenn.

32 Latin America: Facing the Chllllenges of Adjustment and Growth

Table 3. Venezuela-The Evolution of Soda! Expenditure

1987

Total consolidated expenditure (Bs. of 1989 per capita) • Education 3,378.8 • Health 1,768.6

1988

3,241.0 1,642.0

The composition of consolidated Education expenditure (percent) • Current

•

Personnel Operations and Maintenance Transfers to Private Sector Capital

73.9 10.9 11.9

3.3

The composition of consolidated Health expenditure (percent) • Current

•

Personnel Operations and Maintenance Transfers to Private sector Capital

Source: MM<Juez (1989b)

39.7 31.3

3.2 25.9

73.7 10.2 12.6

3.6

40.9 225

7.4 29.1

1989

2,723.2 1,247.8

75.2 11.1

9.0 4.7

50.6 23.9

6.5 19.0

Real per-capita expenditure in education and health declined 16 percent and 24 percent respectively between 1988 and 1989. But, in fact, the effects of fiscal deficit reduction are worse than this, because expenditure reduction has a large impact on the quality of services provided. As the personnel component is quite rigid, expenditure reductions tend to result in a more than proportional fall in complementary inputs which impinge on the operational capacity and on the quality of services delivered by the health and education sectors (see Marquez 1989). The personnel component of public expenditure in health increased from 40.9 percent to 50.6 percent between 1988 and 1989, while in education the change was from 73.7 percent to 75.2 percent .

The Characteristics of Poverty

One of the objectives of social policies during the adjustment process is to somehow shield the poor, and particularly the poorest, from nutritional deficiencies and health risks that may produce irreversible effects on their future productive capacity. This objective poses the problem of identifying the poor and their characteristics in order to render actions and policies focused and effective.2

2 In this paper we tend ·to rely heavily of the absolute criteria of poverty identification, though we also present some information about families in the bottom 10 percent of income distribution. Income data was obtained frOm the Venezuelan Household Survey (OCEI, various years), processed suitably to obtain information on per-capita family income. Data on the cost of the food

Llltin America: Facing the Challenges of Adjustment and Growth 33

Poverty in Venezuela is an urban phenomenon, even if the rural population is over-represented among the poor. In rural areas, though, poverty is more acute. Poverty is also geographically concentrated: the Metropolitan Caracas, Centro-Occidente, Nor-Oriente and Andes regions contain 71 percent of the extremely poor and 65 percent of the critically poor.

Table4. Vene2uela-The geography of poverty

lowest extremely 10 percent poor

percent of poverty group in urban area 565 percent of population in poverty group

National 10.0 Urban area 6.6 Rural area 23.0

percent of poverty group in

1987

73.3

16.6 14.8 24.3

1989

urban area 62.6 75.1 percent of population in poverty group

National 10.0 20.1 Urban area 9.1 179 Rural area 28.6 32.1

critically non-poor Total poor

78.3

:ll.8 29.4 36.8

835

31.2 :ll9 D.l

86.6

52.7 55.8 38.8

889

48.7 51.2 34.8

82.0

100.0 100.0 100.0

84.4

100.0 100.0 100.0

Source: OCEI-Encuestra de Hogares por Muestreo--Semestre II each year

The main change that the adjustment policy introduced in this panorama is an increase in the proportion of extremely poor families between 1987 and 1989, while the proportion of critically poor families remains stable.3 The increase in the proportion of extremely poor is a consequence of (a) increased unemployment in households with high dependency ratios; (b) a more than proportionate decrease in income-­particularly among disadvantaged workers (young and/or female) with jobs in the informal sector; and (c) an important fall in the income of modern sector workers.

consumption basket was obtained from AGROPLAN (1990) who elaborate that figure based on actual food consumption from the Instituto Nacional de Nutrici6n. The officially used food consumption basket, elaborated by CORDIPLAN (1981) seems to over-estimate the number of poor families because it does not take into account actual consumption patterns, but uses a fixed consumption basket estimated in 1983 ignoring the presumably U:nportant substitution effects due to large changes in relative prices.

3. The use of 1987 as the pre-adjustment benchmark is due to the fact that 1988, being an election year, was quite atypical.

34 Latin A;mria.: f"adng U1e Chl<lknges 9f Adjustment end Growth

As a consequen,:e of these movements, the pattern of differentiation ·between different poverty groups is not so clear-cut as it was in 1987. Differences in the proportion of income from informal sector jobs disappears because the fall in real incomes, wage policy notwithstanding, pushed lllOCem sector worker's families below the poverty line (see table A-2 in the appendix). This is particularly true for the most vulnerable groups­families with fen~lie heads of household with high dependency rates were pushed from the clitically poor to the extremely poor.

Whetl>..er these changes irt the natul'e and extension of poverty are transitory or permanent is a question whose answer hinges crucially on the future evolution of employment and real wages. Families that fell below the poverty line because of the decrease in modern sector wages, or went into short-term unemployment will recover their income levels when the economy recovers. However, especially vulnerable families probably saw their position changed forever. On the other hand, if real wages remain at the 1989 level (as the 1990 experience seems to suggest) then families that were pushed below the poverty line will find it difficult to educate the younger generations .and develop their full human resource potential. Important changes in social policies are needed to avoid long-term damage to the human capital endowment of these families.

Employment patterns within poverty groups do not reflect any changes between 1987 and 1989 (see table A-3). Among poor heads of household, those who have a modem sector job tend to have it in services and manufacturing, and those with an informal sector job work mostly in the retail trade. Even so, this pattern is not dramatically different from the non-poor. Two thirds of poor heads of households with jobs in the modem Sector are private employees, and three fourths of those in the informal Sector are self-employed (see table A-3 in appendix). Job characteristics of the poor underline the difficulties of policies oriented towards specific productive sectors to help them.

In policy terms, the situation is far from easy. Just helping those who cannot fill their basic needs implies targeting about half of the population. If the size of the group makes for easy targeting, policy costs make it prohibitively expensive. Besides, the group that needs help is much more diverse and fragmented than what is suggested by the word 'poor'. Nevertheless, there are some common traits across the diverse poverty groups. Poor families tend to be larger and to have more children than the general population, suggesting that policies directed to specific age-groups will be useful devices to orient expenditure towards the poor. On the other hand, poor families also show a low level of human capital accumulation, which tends to explain both their vulnerability, and their inability to escape from poverty by themselves.

Though one could get the impression that poverty is mainly a demographic phenomenon, closer examination of the data shows that this is false. If poor families had the demographic and dependency rates characteristic of non-poor families they would still remain poor, given the low income per worker they are able to earn. Inversely, if workers in poor families had the income per worker of the non-poor, even maintaining dependency rates of poor families they would be able to climb out of

poverty. Income differences aliise from the varia.ticn in the human capital endowment of each population gmup which, in tum, originates from different earning capabilities of the poor and non-poor fawiiies (see table A-1).

Mitigating the Sodal Costs of Adjustxaent: The Vf!nezuelan Experience ·

As part of the policy reform process, the Venezuelan government decided to inc-tease the share of activities directly targeted to the poor in total social expenditures. Part of the eKpansion came from enlarging existing, but previously under-funded programs, with another part coming from the switching of resources from indirect to new direct subsidies (implying a transfer of resources from other ministries to the social area).

As redistributive devices, direct subsidies are to be preferred to indirect subsidies, and narrowly targeted programs to non targeted programs. Cash and in-kind subsidies to the poor delivered through different institutional channels are the preferred new tool of income redistribution. Resources constraints, however, r11ake for hard choices. First, there is a choice about how much to dedicate to social expenditure, especially when these funds are competing with investment funds that are needed to stimulate econorruc recovery. Once this decision is made, the problem still remains of how to allocate resourres between the old, but still existing, social system (health and education ministries, etc.) and the new targeted programs.

Table 5. Venezuela-Social sectoll" budget and pov~t;y alleviation programs

Percent of total social sa-tor· expenditures

Poverty alleViation measures Other social sector

Source: Garda (1989)

1988 1989 1990

129 87.1

(percent)

10.8 89.2

22.4 77/J

A comprehensive short- and long-term poverty alleviation program was drafted in March.1989 to put together the measures proposed. The Plan de Enfrentamiento de la Pobreza was an attempt to conceptualize the problem, identifying which programs contributed most directly and efficiently to the needs of the poor, and direct the new programs to the most able institutions. The more rapidly implemented policies were; the creation of unemployment insurance, a mandatory wage increase, and an ambitious direct transfer program-the Beca Alimentaria. Health, education, and child-care program.s (the Programa de Atenci6n Materno­Infantil, pre-school expansion, and Hogares de Cuidado Diario) were more slowly implementated given the organizational comple::dties involved.

36 lAtin Ameriet~: FIJCing the Challenges of Adjustment and Growth

Institutional reform of some social sector organizations was also initiated, and a labor intensive public works program was announced.

A Brief Description of Policies

In order to render the array of policies included in the Plan para el Enfrentllmiento de la Pobreza tractable we will group them according to the classification proposed by Addison and Demery (1988). A description of individual policy measures is presented in table A~ in the apendix.

INCREASING 1HE RETURN ON ASSETS HELD BY rnE POOR. In light of the potential of political conflict arising from the situation, the government made a conscious effort to generate a consensus regarding policies. As part of this effort, the Acuerdo Nacional de Concertaci6n was signed by trade unions, entrepreneurs, and the government in May 1989. This political covenant established. the general guidelines of wage policies to be adopted, and served mainly as a symbolic announcement that future policies would be previously agreed upon. In this context two across-the-board wage rises, an increase in the minimum wage, and an unemployment insurance scheme were enacted. Since the only asset the poor possess is their labor, these policies could be interpreted as increasing the return on the assets of the poor.

INCREASING INCOME AND CONSUMPTION TRANSFERS. Compensatory schemes, which redirect expenditures away from indirect subsidies, toward direct subsidies have been in most cases easy to implement. The inherent administrative complexity of these direct subsidies was solved by the use of the public educational and health systems as targeting devices, and the private sector as the distribution channel. Nevertheless, the target population was not always the poor. In 1989, 17 billion Bs. were allocated to the Beca Alimentaria, Subsidio a la leche popular, Dotacion de utiles y uniformes escolares (programs directly targeted to the poor), while 8 billion Bs. were designated for interest rate subsidies, which largely benefited the middle class (including some upper class segments of the population). Also, some indirect subsidies (fertilizers, medio pasaje estudiantil, leche popular, and Subsidio a la cesta basica) were maintained, and are only recently being phased out in favor of direct subsidies.

MAINI'AINING HUMAN CAPITAL THROUGH SOCIAL EXPENDITURES AND TRANSFERS. Direct assistance programs were definitely a major area of extension in the Sl."'Ope of social programs. The Plan .de Enfrentamiento de la Pobreza encompassed an innovative health program directed toward pregnant and lactating women and their children, the expansion of child-care facilities, and increases in the coverage of pre-school education. These programs received special attention both from national authorities and from international lending agencies. They were seen as responsive to a multiple set of perceptions favored for different reasons by each agent. First, they were direct assistance programs that were not previously being funded and that were easy to target for children under six years of age. Second, they accomplished two goals: tackling nutritional deficiencies and health risks through preventative action. Third, directly and indirectly, these programs help working mothers cope with child-care needs. And fourth, they all have an educational component intended to permit people to help themselves beyond the duration of the program.

lAtin Amerietl: Facing the CluJllenges of Adjust'IM.nt and Growth 37

CREATING EMPLOYMENT OPPORTUNITIES. Two main measures were implemented under this heading: a labor intensive public works program and a special transitory decree prohibiting firing. Public works programs had previously been implemented in 1984 and 1986 with some success at repairing and . maintaining public infrastructure. The firing-freeze was an innovation in labor market intervention. Given the depths of the recession it was widely perceived as necessary in order to prevent massive unemployment.

INCREASING ACCEss OF THE POOR TO PRODUCTIVE ASSETS. In this area, only one measure was enacted, namely the Programa de Apoyo a Ia Econom{a Popular, a credit, training, and technical assistance program targeted to micro-enterprises. However, the very nature of microenterprises-the fact that they are in the informal sector-render them unsuitable for government intervention. Besides which micro-entrepreneurs are not famous for their eagerness to be registered in official records. Thus, public sector institutions have had to operate jointly with Non-Government Organizations (NGOs), whose experience reaching population segments in poor areas proved a valuable asset. The limited number of NGOs in Venezuela, however, will prove to be a serious limitation in extending these kind of programs.

INsmunONAL STRENGI'HENING. The organization of social programs in the new context required an institutional reorganization of the social sector. Efforts were made to (a) strengthen planning and supervisory abilities of social sector institutions (creation of the Ministerio de Desarrollo Social, Escuela de Gerencia Social, and enhancing the ability to collect data; (b) create parastatal. foundations to more effectively channel public and donor agencies funds targeted to special programs; (c) involve private sector organizations in the execution of policies; and (d) reorganize first and second level organizational and operational institutions (Ministerio del Trabajo, IVSS, INCE). All these measures are intended to enhance the coordination ability and competitive power of the social institutions.

Some Evaluative Comments

It must be said at the outset that no time was lost by the government of Venezuela in adopting measures to shelter the poor from the negative social impact of the adjustment policy. When the policy reform program was adopted, on..: of its explicit aims was to provide some protection for the poor. Shortly thereafter a wide array of measures were soon announced that would benefit the poorer segments of the population. Furthermore, after the February riots political survival dictated that policy measures should be tested and evaluated by their social impact.

Because as of this date no impact or evaluation studies are available, it is difficult to precisely assess the effectiveness of the measures adopted. However, it can be said that the poverty alleviation programs were well designed and coherent. The Venezuelan policy mix without doubt benefited from the fact of being late-comers. The operational experience of other countries and of lending agencies was crucial to the success of direct assistance programs, like PAMI, and Beca Alimentaria. These early successes permit some optimism to the extent that expansion of these kind of programs could help improve poverty alleviation. On the other hand, the creation of a social policy coordination agency (the new Ministerio de

38 Latin AmeriCill: Facing the Challenges of Adjustment and Growth

Desarrollo Social) is wi~hout doubt an important step4 . P AMI, Hogares de Cuidado Diario, and the expansion of pre-school coverage were well targeted to the most vulnerable groups of society-those that fonn the core of poverty in Venezuela and are not protected by any other social policy. However, experience shows that direct assistance programs of this kind require more improvements in institutional capacity than they require in monetary resources. Though targeting was given the highest priority, infrastructure is also needed (particularly in the pre-school area) and some programs have begun to work on this. Given the difficulties in expanding from a very limited initial coverage, along with the institutional weaknesses inherent in the health and education sectors, it is unlikely that we will see results from these programs in the short-run.

Unemployment, wage reductions, and food price increases have also been attacked by direct subsidies (Beca Alimentaria and unemployment compensation), employment creation programs, and mandatory wage increases. The effect of these measures, however, was overshadowed by the jump in the price level and the fall of modem sector employment.

Implementation of the targeted employment program has suffered from the complexities inherent in the organization of public works that is located in thousands of different places and executed by hundreds of different organizations, and by a state whose organizational capabili~ has been deteriorating over time. This, coupled with political infighting, was responsible for delaying the implementation of these programs, and largely explains why fiscal correction at the outset of the adjustment process was so successful (exceeding the agreements with the IMF and World Bank).

The overall impression one has when looking at the situation of social programs in 1989 is two-fold. On the one hanq, when compared with the enormous magnitude of the problems facing the country even before the policy reforms were enacted, the resources and ingenuity devoted to social programs appear very small. However, when compared with past public efforts and considering the organizational capacity of the state, one has to recognize that an impressive effort has been made.

From Mitigating the Social Costs of Adjustment to Investing in the Future: A Policy Agenda

The adequacy of the Venezuelan experience needs to be evaluated not only in the light of how successful it has been at sheltering and cushioning the impad of adjustment on the poor, but also by how much it contributes to the institutional and organizational capacity that is needed to ensure social progress. A new conception of social policies must respond to several problems: How to finance a social security system when almost half of the

4. The decree of creation of the Ministerio de Desarrollo Social has not yet been issued, but the Ministerio de la Famrlill is in fact al'ting as a coordinating agency.

5. The 1989 Plan Especilzl de Empleo was approved by Congress in September, almost five months after it was presented for approval by the executive arm. In October 1990, just over 50 percent of the total funds approved had been disbursed.

Latin Ameriu: FIICing the CluJllenges of Adjustment and Growth 39

population have jobs in the informal sector? How to cater to, and finance, the health needs of 20 percent of the population that live in extreme poverty? How to educate the labor force needed to develop a competitive economy when resources are being diverted away from high-school education~ H we are going to evolve from a natural resource export base of economy into a human capital-intensive export-based economy, how will the human resources be educated?7

We are not disputing the need to protect the poor through targeting, neither do we deny the need to introduce economic rationality in the provision of social services. We do not find better words to express the minimum goal of social programs in an adjustment process than Upton's: " ... each LIC, with Bank group help ... , should be helped to estimate how mAny people are ultra-poor; how much extra income they need to avoid clear caloric risk (i.e., short fall of over 20 percent below requirements, despite 80 percent food/outlay ratios); and wluJt acceptable, cost-effectiw project and policy mix, given these people's location and characteristics would in a given period (5-10 years) render them, say, 9 out of 10 currently ultra-poor households sufficiently productive to reach that income-level, and thus to avoid caloric risk throughout a typical year'' Lipton [1988], page 50

But the fact is that targeting is running the risk of evolving from an instrument into an objective in itself. The sorts of questions that a new social policy must respond to are not exclusively related to the poor, nor should they be, but are connected with the economic conditions for growth and the rules of income ·distribution. Their definition will result in a new institutional ordering in the social sectors, that will allow for a clearer identification of each institution as part of a comprehensive social policy.

Redirecting social expenditure-both making it more efficient in production and delivery, and targeting access more narrowly-is the most daring task facing the new social policy agenda. Technical weaknesses, institutional dispersion, and pOlitical conflicts will conspire against the success of the institutional reforms needed to reach this goal.

The tradition of free, universal access to social services, along with a disregard for budget constraints, made one feel that efforts at identifying beneficiaries, benefits, and program costs were unnecessary.s Low relative salaries in the public sector, especially in the health sector, led to employment of low quality personnel. Furthermore, the tradition in the public sector that technical personnel pursue a bureaucratic career, means that they end up filling managerial functions without the necessary managerial skills or training.

The lack of coordination among social sector operations, both within each sector and between different sectors, has also hindered social policy

6. See Tilak (1988) 1. See Knight and Wasty (1989) 8. Kirchheimer (1989)proposes a model of social spending control where some

programs tend to' explode because of no limitations on target groups and no explicit rules on budget allocation limit the amount of resources dedicated to them. In her terminology, Venezuelan social sectors could be characterized as unstable, exploding programs.

40 Latin AmeriCil: Facing the Challenges of Adjustment and Growth

implementation. Budgets were often allocated on the basis of political power and bargained at the highest level of government, and little effort was made to boost the planning capabilities of the social ministries.9 In order to fill the needs of different target groups, a myriad of different, uncoordinated, and ill-funded programs were enacted. Each one of these created their own client group and internal bureaucracy. That developed a strong resistance against a coordination effort. In this context, it is not surprising that no comprehensive vision of a social policy (as opposed to the particular point of view of each program) arises.

Political conflict arose from two main sources. First, improving the production, organization, and delivery of services meant reduced employment and fringe benefits for the highly unionized and politically active labor force in those sectors. Second, improvements in targeting redirected subsidies away from the middle classes. As the poor are not as organized as the middle class, even if the policy reform does ultimately benefit a a larger section of the population, one ends up with an active and vocal opposition to organizational reforms and little or no organized support in favor of it.10

Social Policies and Economic Policies: Is there a Linkage?

Only the recognition that economic policy is an integral part of social policy, and vice versa, will lead to the ultimate objective of the adjustment process-integrating the poor in economic progress. The ministries in the economic area perceive social policy as fire-fighting with little or no long­term preventative measures being put in place. (Caraballo 1990). The relation between social and economic policies is as one where economic policy is an end in itself, and social policy is supposed to help some disadvantaged groups cope with the consequences.

Failure to integrate the poor in economic progress will not only dissolve social and political support for the adjustment program, but in the long run will lead the economy into the same disequilibria that led to the need for adjustment in the first place. However, the state of the art in mainstream economic literature does not seem to be stressing this point of view. A literature search on growth and adjustment revealed only one paper (Otani and Villanueva 1989) that emphasized the economic role of education as a labor-productivity increasing device to be integrated into a formal growth and adjustment model.

Venezuela in particular, but Latin American countries in general, are not cheap-labor reservoirs and, furthermore, do not want to be. Thus; success in opening-up these economies depends crucially on the creation of

9. World Bank (1990) 10. Opposition is usually enthusiastically supported by political parties eager to

defend what they see as the legitimate interests of their political constituencies, and a source of a large fraction of party finances. The teacher's union, for example, receives the equivalent of one month of the wage raise . agreed in the labor contract. In the last collective contract signed in January 1990 this costas sindicales clause implied the transfer of 300 million Bs., or around 7.5 million US$, to the union.

Latin America: Facing the Challenges of Adjustment and Growth 41

comparative advantages in human capital intensive goodsll. The degree of urbanization, the spread of basic education, and democratic tradition, all conspire against a permanent reduction in real wages, that would be needed for Venezuela to successfully compete in labor intensive goods in the world market.

The mitigating the social cost agenda is a misnomer for social policy. It detracts from the fact that a large scale effort on the social front is required to guarantee the success of structural adjustment. Economists should worry about this not only for moral or equity reasons, but because of sound economic considerations-an ex~ansionary adjustment needs the development of a wider export base.l Yet this can only be done by changing the rules of domestic competition, which at the least eliminate the biases favoring bigger oligopolistic enterprises, and create a comparative advantage in human capital intensive goods. But this will require large investments in education, health, and housing.13

Financing Social Policy

Given the fiscal constraints facing the government, alternative sources of funding must be found to finance social sector investments. Targeting and cost recovery are seen as complementary ways of closing the gap, while simultaneously improving the attention that poorer segments of the population receive. ·

In the early stages, better use of money is needed rather than more · money. There is a general perception that resources in the social sector are misallocated, badly used, and ultimately wasted. In this climate, it is very unlike~y that the social sectors will receive a larger share of public funds. An improvement in managerial practices, to reassure society about the correct allocation of resources in the social sectors, is a pre-condition to any increase in funding.

But we should avoid the misunderstanding that targeting is a sodal policy directed exclusively to the poor. During the fifties and sixties universalism was adopted. A set of institutions were created establishing private and public responsibility in the provision of social services, the most important of which was the social security system. The identification of universalism-as a concept supporting the unalienable right of every citizen to obtain acceptable levels of health, education, social security, and free access for all to social services-was perhaps only natural in a world of abundant resources.

But the crisis made resources scarce. Both the failure of Import Substitution Industrialization (lSI) to make every one a wage-earner, and

11. Naya et al. (1989) 12 The temptation to just close the gap and reduce absorption (i.e., reduce the size

of inefficient public enterprises) may produce a short run equilibrium, but hardly any growth. An expansionary adjustment needs the development of alternative export activities in order to produce the external resources needed to pay external debt and finance growth.

13 For a more developed argument along the internal competition line, see Marquez y Portela (1989)

42 Latin America: Facing the Clulllenges of Adjustment and Growth

the present resource constraints highlight the crisis of the social sector institutions. At the same time the notion of universalism was discarded. While it is clear that free-for-all access is not possible, nor perhaps reasonable, it is not equally clear that universalism should also be thrown away. Though emphasis has been put on pricing (see Jimenez 1990), alternatives to financing social policies should include tax reform and increases in the efficiency of the use of donor and lending agencies funds.

Cost recovery is another option to finance social services, but one that may only be effective once delivery casts are under control. In Venezuela the share of public resources that higher education receives is hard to justify. In reality, however, the cost per student in higher education is high enough to render impossible any reasonable cost recovery. If preceded by efficiency­improving measures, a combination of cost pricing and transfers to poor students would be a welfare improving policy. However, the potential political conflict that this type of measure could generate is so acute, that the government has shied away from it up to now.

On the other hand, and particularly in health services, one should be very aware of the potential damaging effects cost recovery could have on the poor population's access to services (Glewwe and de Tray .1989). Besides, the administration of pricing mechanisms is not trivial, and its costs are not negligible. Pricing not only fulfills a role in cost recovery, it can also be used as a signaling device to discourage the use of overpriced tertiary facilities, such as hospitals, for minor causes that could be adequately treated in primary facilities (clinics). This is the distinction that UNICEF makes between nominal and real user fees (Cornia et al. 1986).

Finally, it should be noted that the budget of the health and education ministries fell in real terms in 1989, while the share of personnel within it increased (see table 4). If this trend is maintained it could result in a reduction in the quality of services delivered. The paradox is that attempts to improve the extension and quality of services to the poor could result in a deterioration of social services, that would punish the very same poor the govenunent is trying to benefit.

The Role of Institutional Development

Because public goods tend to be under-produced under a free market system, successful economies have over time developed a set of social institutions to resolve the wide variety of 'dilemma of the commons' that this situation gives rise to. These social institutions cover a large area, from administrative arrangements to definitions of the scope of community participation in the organization, production, and delivery of public goods. Historically, what these institutions have achieved is an equilibrium of different, and often opposing, constituencies resulting in a more or less efficient pursuit of the common good (as opposed to the particular good represented by the achievement of the private interest of each constituency).

Though much can be done to protect the poor during adjustment by adopting the measures commonly grouped under the mitigating the social costs of adjustment heading, institutional development is still needed to

Latin America: Ftlcing the Challenges of Adjustment and Growth 43

achieve the crucial goal of the adjustment process-namely integrating the poor in economic progress. Institutional development, in this context, refers to three sets of objectives: (a) to strengthen the technical ability of social sectors to effectively plan, produce, and deliver services; (b) to design a social policy that goes beyond the particular clientele and interests of each institution; and (c) to decentralize the control and organization of social services in order to enhance community participation.

) STRENGTIIENING THE TECHNICAL ABILITY OF SOCIAL SECTORS. Social sector institutions are plagued by a lack of qualified personnel, ill-suited managerial practices, and an inability to formulate projects well. This is the result of the high priority given to expanding services, and of budgeting practices based on past allocations instead of on services provided or demanded. The combination of these two practices has resulted in a s~stained increase in the personnel component of total expenditures. When fiscal budgets became tight, union resistance (and conventional wisdom about the objectives of social policy) did not permit personnel reductions. Rather real wages and complementary inputs suffered more than proportional reductions. The end result is that the public sector is only able to attract low-quality personnel and operates with limited resources.

Though the government has made an effort to initiate organizational reforms in the social area, much more needs to be done. First, special attention should be given to the creation and enhancement of the planning capacity of social sector ministries, which today is practically non­existent. Second, managerial training is badly needed, and it should be a requirement in filling hierarchical positions. A change in recruiting and advancement practices (including an eradication of party nepotism) is also a prerequisite to improving the quality of personnel in the social sectors. Third, follow-up of the reform process is needed to ensure substantive changes, especially those changes that are likely to be opposed.

CONCEIVING A SOCIAL POUCY THAT GOES BEYOND PARTICULAR INS1TIUilONAL INTERESTS.

The social sector is characterized by institutional dispersion, with every institution perceiving its mission and resources being in competition with the others. History, client interests, and bureaucratic infighting to a large extent explain this situation. Each ministry in the social area perceives itself as isolated from, and competing with, other social ministries for resources and activities.

This situation results in a fragmentation of social policies, without any perception that each ministry's activities are part of an overall strategy to solve both the development of human resources needed. for the growth process, and the financing, production, and distribution of social service provisions in a world of scarce resources.

In this context, a central organization should have the responsibility to define each institution's mission and target population, the rules for financing its activities, and the definition of its program. These definitions will result in a new institutional ordering in the social sectors and the role communities and NGOs should play in it, eliminating wasteful duplication of functions. The Venezuelan government,· with the creation of the Ministerio de Desarrollo Social, recognized this need. However, one should be aware of the enonnous difficulties facing this new Ministry. It is

44 Latin America: Facing the Clulllenges of Adjustment and Growth

afflicted by problems of legitimacy and staffing. To legitimize the role of an institution that lacks its own operational budget, and whose mandate is to coordinate how other ministries' operational budgets should be spent, will not be easy and is counter to Venezuelan tradition.14 Staffing this coordinating body with the high level personnel it needs, is again very difficult given the wage constraints that the public sector faces.

DECENTRALIZING TIIE CONTROL AND ORGANIZATION OF SOCIAL SERVICES Both efficiency and equity reasons are sound arguments for decentralization. Nevertheless, decentralization is a difficult item on the institutional development agenda.15 In Venezuela, the fact that fiscal resources are centrally collected from taxes on oil exports, and the absence of popular organization beyond highly centralized unions and political parties, makes the decentralization discussion an extremely difficult one (Cartaya and Garcia 1988).

Budgeting and the organization of production and deliv~ry of social services are extremely centralized activities. Budgeting even escapes the formal planning organizations of the central social ministries, and it ultimately winds up at the highest level of government.16 Control of day­to-day operations is generally located at the top level in the ministry, where the weak planning office often makes for arbitrary, politically­based decisions with little or no connection with needs and/or demand.

On the other hand, Venezuela stands out as one of the Latin American countries with little local government intervention in the provision of social services. So, decentralization is not just a matter of expanding local capabilities, but of creating entirely new ones from production, to control, to planning. Nevertheless, the political decentralization (begun with the direct election of local authorities) is creating mounting pressure for more intervention by local governments in the area of social services.l7

But, decentralization is not exclusively a problem of setting up local bureaucracies (which are not necessarily any less predatory than central bureaucracies) but largely a problem of social control (Bustelo 1988). Decentralization is useful in putting problems and decisions at organizational levels manageable by local society, but by itself decentralization is not sufficient to produce social reform. In organizational terms, a distinction should be made between the production, financing, and access to social services, where different combinations of public and private sector involvement is needed. Market mechanisms can and should be used to

14. The sole successful experience Venezuela has had in this area was made in 1975, giving FUNDACOMUM (a local community development organization) veto power on state/national coordinated budget assignments.

15. In Chile, where political control was not precisely a problem, decentralization was nevertheless a long, difficult, and costly process. See Castanheda (1989)

16. Budget allocations are discussed in an informal, but politically binding, meeting between the President and the State Governors. Though this meeting encourages regional participation in policy decisions, its does not leave any room for technical or social control of the budget allocation decided.

17 A reform of electoral law allowed for the first time direct election of regional and local Governments in the December 1989 elections. Before that, Governors were appointed directly by the President.

Latin America: Facing the Challenges of Adjustment and Growth 45

increase consumer power and involvement in the design of program content, the choice of beneficiaries, and financing rules. Nevertheless, it should be recognized that the same microeconomic, organizational characteristics of the problems faced in the design of social policies requires a case by case approach, based on judgements about whether or not the chosen design enhances efficiency and equity.

Both technical strengthening of local planniAg and producing capabilities, and an institutional organization that favors participation of users and the community at large are needed. Kirchheimer's (1989) notion of gate-keepers gives operational content to this affirmation. To the extent that community and users are institutionally involved in the design of program content, the choosing of beneficiaries, and the financing rules of the program, social control will be effective and successfut.18

Nevertheless there are risks involved in decentralization. First, if poor communities are put in charge of social services for the poor, a vicious cycle of financing problems and low quality services may result. Some general standards of guality, and some operational rules to enforce them, . must be developed. 19 Second, clientelism is a real danger in the framework of a government-sponsored effort to expand social participation. But using technical personnel to inform users and the community about needs, demands, and costs could be effective in reducing the role of clientelism.

Some Concluding Remarks The Venezuelan government has without doubt made a considerable

effort to cope with the social consequences of adjustment policy. Poverty alleviation policies have been well designed and efficiently implemented. However, it is our conten~on that social policies must be evaluated not only in relation to the short term protection provided to the poor, but also on how much effort is invested in building adequate institutional and organizational conditions for a more comprehensive design of social policies.

The main conclusion of this paper is that while the Venezuelan government made important efforts to shelter the poor, very little was done in order to rebuild traditional social service institutions. Partly this was due to the perceived urgency of protecting especially vulnerable groups that

18. However, this is more easily said than done. In the process of trial and error characteristic of the. direct subsidy programs, neighborhood organizations were involved in the distribution of milk at subsidized prices. When the government became aware of the leakages in the system it tried to modify the program, but was met with strong vocal opposition from neighborhood organizations. .

19. A good example of this is the national end-year examination for high-school students that existed in Venezuela until the mid-eighties. The examination warranted that a minimum standard of learning prevail in every high-school, independently of its location, affiliation, and socio-economic status of its students. The elimination of the examination effectively lowered the standards, and allowed quality differentials to creep in. This is an example of how an apparently non-consequential rule-and one that cost very little in terms of public resources-if adequately implemented, can help to eliminate quality differentials that would otherwise prevail.

46 Latin America: Facing the Challenges of Adjustment tmd Growth

dominated the social policy scene after adjustment. But this is also the result of disenchantment with the traditional design of social policies, characterized by a drive to increase coverage at any efficiency cost. Focusing and targeting, keywords in a poverty alleviation effort, are becoming the leit-motiv of social policy organization.

The old design of social policies certainly need a major overhaul but the right of every citizen to a minimum standard of health, education, and social security should still be the guiding principle in social policy design. We do recognize that some of the new insights against which we argue are a welcome, refreshing, and innovative view of the real problems and to some extent are a reversal of failed populist recipes. We also recognize that the contradictory pressures of financial constraints and mounting poverty problems generate dilemmas that are not easy to solve. However, these dilemmas arise from the neeq to maintain a viable society in the long run and to guarantee social progress by developing the human resources needed in the context of expansionary adjustment.

The notion that economic and social policies are different and separate entities, in fact, conspires against the success of adjustment and development by overlooking the need to sustain and increase human capital accumulation. The enthusiastic adoption of the mitigating the social costs of adjustment agenda is, in a sense, a return to the discredited 'trickle-down' argument, where growth is supposed to solve the poverty problem, and social policy's fundamental role is to. cushion the immediate and irreversible damage that affects the most vulnerable groups of the population.

The inefficiencies that plague the social services today are the result of a deadlock between the private interests of various constituencies and do not allow the achievement of the common good. Beyond well designed microeconomic and organizational solutions, the problem is one of achieving a new political equilibrium that allows a more efficient pursuit of the common good. Thus, politics and politicians are not 'extra-economic constraints', but rather an indispensable part of the solution.

Targeting is running the risk of evolving from an instrument into an objective in itself. The sorts of questions that a new vision of social policy must respond to are not exclusively related to the poor, nor should they be, but are connected with the economic conditions for growth and the rules of income distribution. From a political standpoint, history teaches us that even the best targeting will not give the poor access to social services if social services are diminishing. As Birdsall and James (1990) point out, historically the poor have gotten access to social services only when access was expanding.

Institutional development is needed to build a renewed consensus around social policy, that solves both the development of human resources needed for the growth process, and the financing, production, and distribution conundrums of social services in a world of scarce resources. Poverty alleviation as the center of social policy risks turning attention away from the real problems of social policy, embodied_ in the inefficiency of traditional health, education, nutrition, and social security apparatus. Without a thorough restructuring of these institutions a comprehensive

lAtin Amerial: FIICing the ChAllenges of Adjustment and Growth 47

social policy, that goes beyond poverty alleviation, is not feasible. The paradox is that by attempting to improve the extension and quality of support to the poor, one could end up deteriorating traditional social services, and so punish the same poor that the government is trying to benefit.

Decentralization is crucial in the process of building a new consensus around social policies, both as an efficiency increasing device, and as a way to increase community participation and decision making. In Venezuela however, given the low degree of community organization and the non­existence of an autonomous local government tradition, decentralization poses particular problems. Devolution of functions to local governments, creation of financial autonomy, training of local government officials, and an increase in community participation in the design and supervision of programs should be high priority items in Venezuela's social policy agenda.

48 Latin America: FRCing the Cluallenges of Adjustment tlnd Growth

References

Addison, T. and L.Demery. 1988. The Economics of Poverty Alleviation Under Adjustment, Country Economic Department, The World Bank.

AGROPLAN C.A. 1990. Perspectivas Agroalimentarias 1990, mimeo, Caracas

Birdsall, N. and E. James.1990. Efficiency and Equity in Social Spending. How and Why Governments Misbehave, WPS 274, The World Bank

Bustelo, E. 1988. Polftica social en un contexto de crisis: sera que se puede?, IDE/ILPES/UNICEF, mimeo, Santiago

CORDIPLAN. 1981. f.studio de Consumo Mlnimo Normativo para el Area Metropolitana de Caracas, mimeo, Caracas

Cartaya, V. and _H. Garda. 1988. Infancia y pobreza: los efectos de Ia recesi6n sobre Ia infancia en Venezuela, UNICEF/Nueva Sociedad Eds., Caracas

Cartaya, V. and H. Garcia. 1990. La decada de los ochentll y Ia infancia en Venezuela, mimeo, Caracas ·

Castaneda, T. 1989. Innovative Social Policies for Redudng Poverty: Chile in the 1980s, The World Bank, Draft

Caraballo, A. 1990. El Ministerio de Desarrollo Social y Ia nueva polltica social del Estado, ILDIS/Ministerio de Ia Familia, draft

Cornia, G., R. Jolly and F. Stewart. 1986. Ajuste con rostra humano, Siglo XXI Ed., Barcelona

Escobar, G. 1990. E! impacto de las finanzas publicas sobre Ia estabilidad c(clica y Ia distribuci6n del ingreso en Venezuela, Papeles de Trabajo IESA, Caracas

Garda, H. 1989. El Presupuesto de 1990 y el Plan de Enfrentamiento de Ia Pobreza, Ministerio de Ia Familia, Caracas

Glewwe, P. and J. van der Gaag. 1988. Confronting Poverty in Developing Countries, LSMS Working Papers, no. 48, World Bank.

Glewwe, P. and D. de Tray. 1989. The poor in Latin America During Adjustment: A Case Study on Peru , LSMS Working Papers, no. 56, World Bank.

Heller, P. et al. 1988. The Implications of Fund-Supported Adjustment Programs for Poverty, Ocassional Paper no. 58, International Monetary Furo

Latin America: FIICing tire Challenges of Adjwstment and Growth 49

Jimenez, E. 1990. Socilll Sector Pricing Policy Revisited: A Survey of Some Recent Controversies, Proceedings of the Annual Conference .on Development Economics, The World Bank:109-138

Kirchheimer, D. W. 1989. Control of Social Spending: Gates and Gatekeepers, Public Administration Review, July/ August 1989:353-361

Knight, P. and S. Wasty. 1989. Human Resource Development: Compilrative Trends in Resource Allocation in lAtin America, Asill, and Europe, Seminar of Planning and Evaluation of Social Sectors in Latin America, Rio de Janeiro,

Lipton, M. 1988. The Poor and the Poorest: Some Interim Findings , World Bank Discussion Papers, no. 25

Marquez, G. 1989. The Evolution of Public Expenditure in Education, Health, and Housing in Venezuela World Bank, draft

Marquez, G. and Portela C. 1989. Los informales urbanos en Venezuela: Pobres o Efidentes?, Simposios IESA

Marquez, G. 1990. Escaleras y Ascensores: Ia distribuci6n del ingreso en Ia decada de los ochenta, Simposios IESA

Medici, A. 1989. Saude e Crise na America lAtina (impactos socuns e politicas de ajuste), Revista de Administraci6n Publica, Maio/jul. 1989, 23(3):7-98

Naya, S. et al., eds~ 1989. Lessons in Development: A Comparative Study of Asill and Latin America, International Center for Economic Growth

Rodgers, G. 1987. Labor Market Mechanisms and Urban Poverty, Discussion Paper, International Institute for Labour Studies, Geneva

Tilak, J. 1988. Education, Economic Growth, Poverty and Income Distribution: A Survey of Evidence and Further Research, World Bank Discussion Papers

OCEI vs. years Encuesta de Hogares por Muestreo - Total Nacional

Otani, I. and D. Villanueva. 1989. Theoretical Aspects of Growth in Developing Countries: External Debt Dynamics and The Role of Human Capital, IMF Staff Papers, vol. 36, no. 2: 307-342

World Bank 1990. Venezuela A Review of the 1990-1993 Public Sector Investment Program , draft

Appendix

Table A-t. Sodo-demopaphlc: c:harac:terlatlc:s of households Veaauela, 1989

Lower I EzlrtuMly Crilically Nora-poor Tottll 10 pucent p~ POOl'

Urbara

Total memben 6.8 6.7 5.6 4.4 5.2 of which younger than 15 3.6 3.4 2.4 1.2 2.0 pm:ent with worldna diaabilitiea 2.7 2.1 1.3 1.0 1.3

M6mbers tlud lliSist to school

(u pen:ent of memben in the 110 poup) 10-14 89.0 89.2 91.9 93.5 91.5 15-19 59.7 56.5 58.1 60.0 58.5 20-24 19.4 22.4 18.1 33.6 26.6

HUll of lwuseltold duaradnistics

percenl women 28.9 24.3 18.3 16.7 18.6 Age

Malo 43 43 42 43 43 Female 49 48 51 48 49

Scboolin& (yean) Malo 5.0 5.0 7.0 9.5 8.1 Female 3.1 3.5 4.5 7.5 5.7

Sowc.: Eoc.ata de Hos~ra por Muucreo (OCEI. Semarer n 1989)

Table A-2. The Geography of Poverty Venezuela

Urluur

pert:C:nt of poverty group in urban area

pen:ent of pqNiation in pow:ny group

NaJiona1 Udlanarea Rulalarea

Lowest 10 poctull

45.5

10.0 6.6

23.0

Extremely poor

73.3

16.6 14.8 24.3

Sowu: OCEI- &cuaaa de lfoprel por Muea1n0.

Critically Nora-poor Total poor 1987 ------------------------------

(perc:ent)

78.3 86.6 ·82.0

30.8 52.7 100.0 29.4 55.8 100.0 36.8 38.8 100.0

Lowut btre~Mly Critically Nora-poor Total 10 pucerat poor poor

1989 ------------------------------

62.6 75.1 83.5 88.9 84.4 it ... :&

).

10.0 20.1 31.2 48.7 100.0 I 9.1 17.9 30.9 51.2 100.0 R.

28.6 32.1 33.1 34.8 100.0

[ 4 f

l " t I. a

l "' ...

TableA-3. Income and Labor Market Characteristics Venezuela

Low~st Eztr~rMly Critically Non-poor Total 10 pucent poor poor

1987 --------------------------------

Urban

Average income (Bs) . 1,450 2,033 4,027 9,424 7,390 Income per employed 1,291 1,742 2,408 4,519 4,065 percent of income from

informal sector 61.8 52.7 39.4 31.7 37.1 percent of bead on total

income 67.1 66.8 64.0 58.4 61.3 Members in the labor

force 1.5 1.5 1.9 2.2 2.0 Unemployment rates 25.1 22.2 12.0 5.2 9.1 Participation rates

Male 72.6 78.6 78.3 84.0 81.5 Female 28.3 21.5 27.7 45.4 36.1

Sowc~: OCEI - Encuesta de Hog~res por Muestreo.

Lowest E:xtr~rMly 10 p~rcent poor

............................................................

2971 4098 2575 3292

48.8 48.8

64.7 66.7

1.6 1.6 27.9 22.2

73.9 75.4 25.7 24.1

Crit~ally Non-poor Total PDf'' 1919 -------------------------------

7663 18053 13707 4922 9078 8034

43.4 39.8% 42.5

68.2 59.8% 63.6

1.8 2.1 1.9 13.5 5.3 10.2

80.2 84.3 81.4 30.7 52.0 39.7

~

t' -;· )..

l ~-., J· if [ 1

11 ~

$ ~-

i a. t C'\

1 ;.-

lAtin America: Facing the CMllmges of Adjust'IM1lt tmd GrOtolh 53

Table A-4. What Do the Poor Do for a Living? Venezue~ Urban Areas

1987 ------.. - --------------- 1989 -EJar~~Uly Criliallly N011-poor TOIIJJ EJarciiUly Crilically No"·P- TOIIIJ

poor ptHJr poor . poor

(percent) Household heads

• Unemployed 11.1 3.8 0.8 3.1 9.0 2.8 1.2 3.1 • Employed ill lhe modem ledOr 37.8 54.1 64.9 58.0 42.4. 65.1 68.4 63.0 • Employed ill lhe informal aec:lor 51.0 42.1 34.3 38.9 41.6 32.1 30.4 33.9

Of thole ill lhe modem sector Public: employee 41.0 29.2 32.8 32.6 34.1 37.0 35.7 35.9 Privalc employee 59.0 67.2 55.8 59.2 62.8 58.4 52.3 55.4 Self-employed 0 0.2 1.3 0.9 1.4 1.7 2.6 2.2 Employer 0 3.5 10.1 7.4 1.7 2.9 9.4 6.5

Mmufac:toring 22.9 27.8 22.1 23.7 20.8 25.1 21.1 22.3 Consuuc:tion 9.6 13.3 10.3 11.1 10.5 8.8 5.9 7.3 Commen:e 6.3 9.3 17.1 14.0 10.6 12.5 16.5 14.6 Setvicel 37.5 32.5 28.5 30.4 33.8 34.4 33.7 33.9

Of those in the informal ledOr Privalc employee 22.7 23.5 18.8 21.0 18.8 17.4 9.0 13.7 Self-employed 69.0 65.7 47.8 57.3 71.0 67.3 63.0 66.1 Employer 8.3 10.8 33.5 21.8 10.2 15.3 28.0 20.2

Conauuc:tion 18.3 17.8 11.9 14.9 7.2 14.2 7.0 9.1 Commerc:c 33.4 31.4 38.7 35.4 32.6 36.7 31.8 36.2 Transport 8.0 19.9 16.1 15.8 15.1 20.1 18.8 18.3 Services 16.2 15.1 14.3 14.9 17.6 11.5 16.0 15.1

Noa JIOUiehold lleada • Unemployed 35.8 18.7 8.3 13.9 36.9 22.5 8.9 16.6 • employed in the Modem sec:ror 40.0 49.8 64.6 58.0 35.8 48.4 65.8 56.6 • employed in lhe Info~malledOr 24.3 31.5 27.1 28.1 27.3 29.1 25.3 26.8

Of thole in lhe modem sector Public: employee 7.1 24.9 35.2 30.7 19.5 29.1 36.2 32.8 Privaae employee 77.3 68.3 59.8 63.1 64.2 65.3 58.9 61.0 Self-employed 0.5 1.6 1.1 1.2 0 0.7 1.3 1.0 Employer 0 0.2 1.3 0.9 0 0.0 0.4 ·o.3 Family help 15.2 5.1 2.7 4.2 16.3 4.9 3.2 4.9

Manufacturing 25.3 '18.8 23.5 22.5 17.7 24.0 19.8 20.6 Commerc:c 14.0 17.3 15.9 16.1 19.3 15.6 17.4 17.2 Finmc:e 4.5 6.3 8.1 7.4 5.0 6.7 12.7 10.5 Setvicel 26.4 34.8 40.4 38.1 26.6 33.0 41.4 37.9

Of those in the infOIDlalledOr Privalc employee 53.4 58.5 46.6 50.9 49.7 57.2 45.3 49.7 Self-employed 46.3 38.8 45.1- 43.6 50.3 41.8 43.5 44.1 Employer 0.3 2.6 7.7 5.5 ·o 0.9 11.2 6.3

Mmufac:tDring 16.4 14.6 15.2 15.1 8.9 17.2 10.7 12.4 Consuuc:tion 4.0 15.0 7.7 9.7 7.6 15.0 6.1 9.1 Cammen:e 21.6 22.2 30.7 27.2 28.6 32.3 33.6 32.4 Services 41.7 27.0 30.3 30,3 35.9 27.5 30.5 30.4

Sourc•: OCEI • Eacuecta de H01ares por Mualn:o.