In Pursuit of "Growth with Equity": The Limits of Chile's Free-Market Social Reforms

September 25, 2007

Because Chile's social policy remains subordinate to the logic of the marketplace, the government The 1990 inauguration of cdaIIfI.L President Patricio Aylwin, the wi head of the Concertaci6n of Parties for Democracy, a chasm coalition of center and left-wing political parties, marked the end rich ar of 17 years of harsh military rule and the beginning of Chile's transition to democracy. The principal motto of the Aylwin administration was "growth with equity"-a notable counterpoint to the neoliberal model implemented by the previous military regime, which maintained that income redistribution could only come from economic growth. While'the dic- tatorship had succeeded in achieving high economic- growth rates-8% annually by the end of the 1980s-- income inequalities actually worsened. The number of poor Chileans doubled during the Pinochet regime. By 1989, 44% of Chileans lived in poverty. The Aylwin government argued that economic growth was a neces- sary-but not sufficient-condition for achieving greater equality in Chile. This emphasis on equity was not based only on an ethical concern for social justice, however. The Aylwin administration also sensed that the equity issue was key to the consolidation of Chile's newborn democracy. Pilar Vergara is senior researcher at the Latin American Faculty of Social Sciences (FLACSO) in Santiago, Chile. She is the author of numerous books and articles on Chilean social policy including Politicas hacia la extrema pobreza en Chile, 1973-1988 (FLACSO, 1990). Translated from the Spanish by NACLA. ic b 1C .UUII Ler The government did not pro- Sening pose either a return to the pop- ulist practices of the past-a etween strategy that other Latin American governments presid- d poor. ing over new democratic regimes had tried, with disas- trous results-or a continuation of the dominant neoliberal ideology of the military government. Its proposal was based on the premise that policies pro- moting economic growth and stability must continue, but that they should be complemented with social policies designed to promote greater equality. The Aylwin administration's approach to equity diverged from the neoliberal model in its emphasis on promot- ing greater equality among Chileans through social and labor policies directed at the poorest sectors of Chilean society. Nevertheless, it remained firmly within the framework of the free-market model inher- ited from the military. President Eduardo Frei, also from the Concertacidn, was elected to office in 1993. His administration continued the previous govern- ment's efforts to make economic growth compatible with achieving greater equity. Over the past decade, the social reforms carried out by the Chilean military regime have been celebrated as a model for other Latin American countries anxious to overcome the endemic crises of their social-security sys- tems. The policies introduced by the Aylwin and Frei governments to reduce poverty levels within the free- market system, and the initial success of those efforts, Vol XXIX, No 6 MAY/JUNE 1996 BY PILAR VERGARA 37REPORT ON SOCIAL POLICY reinforced the belief that Chile was a viable model for other countries engaging in social reform. Little attention has been paid, however, to the way the Concertacidn governments' redistributive efforts have been hampered by the new social institutions established during the Pinochet regime. An examination of the successes and limitations of Chile's social policy reveals how neoliber- al social reforms have fundamentally restricted the scope and impact of the Concertacidn's at- tempts to achieve "growth with equity." ocial inequalities had reached unprecedented heights during the 17 years of military rule. The deterioration of basic public services due to constant cuts in social spending under Pinochet affected not only the poorest sectors of society, but also large segments of the middle class. Pent-up social problems had given rise to great expectations of reforms under a democratic government, raising the specter of an explosion of demands that could destabilize Chile's new democracy. The Aylwin government's ability to implement redistributive policies, however, was seriously limited by other legacies of authoritarian rule. The military's neoliberal economic policies-including the steady lowering of tax rates and hence government revenue since 1984, the public debt contracted to rescue the financial system after the 1982-1983 crisis, and the end of revenue from the privatization of public enter- prises, which were all sold off by 1989-imposed serious budget constraints on the new democratic regime. This impeded the Aylwin administration's ability to increase social spending without creating fiscal problems. Within this context of sharp social tensions and bud- getary constraints, the government devised an over- arching plan to carry out its redistributive tasks. The plan consisted of three basic elements. First, the gov- ernment implemented a tax reform to generate more funds to underwrite the state's social-policy programs. Together with international grants and loans, this tax reform permitted the government in its first year to increase social spending by 17% without provoking macroeconomic imbalances. Resources devoted to social spending increased from year to year. By 1993, social spending had returned to its historic level of 15% of the gross domestic product (GDP), although it remained below 1970 values in per capita terms. The second element of the Aylwin government's pro- gram was the targeting of social spending to reach the poorest sectors of the population. This strategy, the government believed, would help avoid the market dis- tortions that other redistributive mechanisms, such as price controls, caused. New and innovative social pro- grams were designed that focused on social groups such as female heads of household, youth, and indige- nous communities. The government increased subsi- dies to low-income groups, and raised the minimum A public hospital in Santiago. wage. Primary health care was expanded, and the gov- ernment invested in new hospital equipment. A pro- gram was launched to improve the quality of basic education and to expand the school nutrition program. These programs were implemented in a decentralized manner, and emphasized the participation of the bene- ficiaries and the promotion of local self-help efforts. Overall, the government gave priority to social pro- grams that represented an investment in human capital, which would promote long-term growth, as opposed to aid programs. As part of this effort, the government established the Solidarity and Social Investment Fund (FOSIS), whose principal objective is to finance projects that promote productive employment for the poorest sectors. The FOSIS does not directly implement projects. Rather, it finances projects designed and administered directly by the social organizations of the poorest communities within each region, often in coordination with local non-governmental organizations (NGOs). The FOSIS has funded 52,000 projects in its four years of opera- tion. These projects tend to be small and short-term. They are focused on marginalized sectors of society such as unemployed youth, campesinos, and small- enterprise workers. The FOSIS initially promised to work closely with existing government ministries, but in practice it often operated independently of them. NACIA REPORT ON THE AMERICASREPORT ON SOCIAL POLICY While this permitted the FOSIS greater flexibility and helped avoid bureaucratic tangles, it also undermined the continuity of the projects. Finally, the government proposed a labor-reform law, which, after some modification, was accepted by labor, business and the opposition parties, and approved by parliament in 1990. The new law reestab- lished a series of rights and guarantees that had been A private hospital in Santiago. denied to workers under the military regime-includ- ing the rights to strike, to form a union, to collective bargaining within productive sectors, and to protection against arbitrary firings or lay-offs. Workers were thereby given the chance to negotiate how the benefits of growth were distributed. Chilean businesses are, however, still allowed to adjust salaries in times of economic downturns or macroeconomic changes in order to protect their ability to remain competitive with foreign companies. his new set of policies registered quick and pos- itive results in the context of strong economic growth. In the three years of Aylwin's adminis- tration, the minimum wage increased 24% in real terms, the purchasing power of Chilean families increased 70%, and average incomes grew almost 18%. These upward trends, coupled with the hundreds of new jobs that were created, led to a significant increase in the portion that household income repre- sented within the GDP. Since 1993, these indicators have continued to improve, though at a slower rate than before. The crowning achievement of the Aylwin administration's new social policy was the reduction of poverty: the percentage of Chileans living in poverty declined from 44.6% in 1989, to 33% in 1992 and 28% in 1994. Not all of the Aylwin government's redistributive ini- tiatives, however, enjoyed the same level of success. The limitations of these efforts became increasingly evident during the Frei administration. While the huge inequalities of income distribution that had congealed under the military regime were reduced (though only slightly) during the Aylwin administration, by 1995 they appeared to be increasing again. For example, while the average Chilean family aug- mented its per capita income by 5% between 1994 and 1995, the poorest 10% saw their income fall by 4.3%. The same concentration of wealth can be seen from a different angle. For the first time since the return to democra- cy, the annual growth of real incomes fell from 5% in 1994 to 4% in 1995, dropping below the increase of average economic productivity (7.1%). As a result, the income share of GDP fell (34.8% to 33.4%), while the share of capital profit increased (from 38% to 44%). Although Frei has a more openly pro- business bent than his predecessor, he has also encountered a less auspicious environment for his redistributive poli- cies. For example, the government's attempt to extend the 1990 tax reform, which was ini- tially approved for a period of only four years, ran up against implacable resistance from the business own- ers' association as well as right-wing opposition parties. Consequently, the Frei administration was stripped of an essential tool to reduce social inequalities. The gov- ernment's attempt to expand the labor reforms to include non-unionized workers, who represent nearly three-quarters of the labor force, has also run up against a brick wall. After nearly two years, the government has still not obtained parliament's approval for these modi- fications. As a result, the Frei government's social poli- cy has been unable to go beyond Aylwin's initial achievements or to reverse the country's widening income gap. State social spending has historically been the princi- pal mechanism in Chile by which social inequalities were reduced and channels of social mobility opened. Despite the best intentions of the Aylwin and Frei admin- istrations to overcome fiscal constraints on social spend- ing, however, insufficient resources have been directed to social programs over the past few years, given the mag- nitude of the accumulated social needs. In 1990, for example, the government-mandated increase of family allowances and workers' minimum pension payments alone ate up half the total funds generated by the new tax reform. Vol XXIX, No 6 MAY/JUNE 1996 0 0 o o 3 39REPORT ON SOCIAL POLICY An analysis of the overall impact on living standards of the government's economic and social policies high- lights how ineffectual social policy has become as an instrument of redistribution. The reduction of poverty in the first years of the Aylwin administration can be largely attributed to economic growth, rather than the new social policy. It's important to remember that the expansion of employment, which began after 1989, took place as Chile was recovering from a severe economic recession. Growth in real wages during this peri- od was facilitated by the 1990 labor reforms and government-mandated increases in the minimum wage as well as by the elimination of restrictions on union activity. Furthermore, the drop in inflation improved the overall pur- chasing power of the population. Once growth rates begin to stabilize and are sustained by increases in productivity rather than the use of idle labor capac- ity, the benefits to the poor will begin to taper off. In addition, significant segments of society have been systematically mar- ginalized from the benefits of econom- ic growth, at least in part because they Youth lack the skills and training to join the workforce. This "hard core of poverty"-subsistence farmers, rural migrants to the cities, the elderly, and women and youth who lack vocational training-will only be reduced with the help of specific social policies and programs. While the government has developed social programs directed at the poorest, the amount of resources directed to this sector remains meager. The FOSIS, for example, represents less than 1% of the gov- ernment's social budget-far too small to have any enduring impact. An important segment of Chile's middle class, which fell into poverty during the military regime, has also not benefited from economic growth or the government's new social policy. The impoverished middle class lacks the personal resources to pay for private services, but has also remained largely ineligible for state benefits. The hopes that this group in particular placed in Chile's new democratic governments have been dashed, giving rise to social protests, especially among teachers and health-care professionals who work in the increasingly beleaguered public sector. More fundamental problem with Chile's social policy is rooted in the model of social welfare inherited from the dictatorship. Under the mili- tary, the state reduced social spending and retreated from the social sector by privatizing social services and creating new institutions guided by the laws of the mar- ket. A broad program of reforms, referred to as social "modernization," transferred to the market and the pri- vate sector the task of providing goods and social ser- vices previously offered by the state. As a result, the state's capacity to influence the living conditions of the population through traditional social-policy measures was significantly reduced. s sell windshield wipers on a street corner in Santiago. A brief look at the reforms of the social-security sys- tem and the health-care sector reveals the underlying principles that guided social reform under the military regime. As these social sectors were privatized, new institutions emerged that have fundamentally reshaped the provision of social welfare in Chile. While the state continued to provide limited benefits to the poorest, the social sector soon became dominated by powerful pri- vate institutions guided by the profit motive. The old public social-security system in Chile was based on combined contributions from workers, their employers and the state that were distributed by the government once the worker retired. Reforms initiated in 1981 replaced the old system with a new one based solely on workers' individual contributions, which are administered by private, profit-making entities known as the Administrators of Pension Funds (AFPs). Workers who chose the new system were given "bonds of recognition," which permitted them to transfer their contributions to the old system into the AFPs. While the traditional social-security system continued to be administered and guaranteed by the state, strong incen- tives-including a reduction of the payment rates from 23% to 13.5%-convinced most workers to switch to the new system. The state had to pay out the accumu- lated contributions of all those workers who switched to the new AFPs, resulting in the systematic transfer of NACIA REPORT ON THE AMERICAS 40REPORT ON SOCIAL POLICY state resources to the private sector. Every year, a quar- ter of the state's social budget goes toward these pay- outs. The impact on the old social-security system was devastating: this crucial loss of resources generated a deficit of nearly 5% of GDP within the traditional social-security system, which will last at least until the end of the decade. Private medicine was also given a boost when the gov- ernment authorized the establishment of Insti- tutions of Provisional Privatization Health (ISAPRES). These profit-making enterprises, has created a dual which resemble Health welfare system. Maintenance Organi- zations (HMOs) in the A private system United States, offer med- ical services in exchange with high-quality for an obligatory con- services coexists tribution of 7% of affil- iated workers' salaries. with an Huge resources that once sustained the state-run underf inanced clinics and hospitals were public system. then transferred to the ISAPRES, resulting in a serious deterioration of the public health system and, consequently, of the health of the poorest who depend on that system. By the end of the 1980s, about half of the health-care contributions of workers, as well as nearly 30% of state expenditures for the health sector, went to the ISAPRES, even though they provided health-care services to only 12% of the population. Because the ISAPRES are profit-making enterprises, they have excluded elderly people, the chronically infirm, those who suffer from preexisting maladies, and individuals with large families. These groups have been pushed into a public health sector that is increas- ingly underfinanced, understaffed and underequipped. The majority of the ISAPRES affiliates cannot afford plans that include coverage for costly diseases or health problems. As a result, people suffering from ill- nesses that demand expensive treatments have little alternative but to turn to the public health system-- even though many of them have paid into the ISAPRES system. The already inadequate public health system is thus further overloaded. In addition, the ISAPRES do not engage in educational activities to promote preventive health care, nor do they cover maternity care or workers' compensation. The privatization of social services has had important implications for the process of capital accumulation. Coupled with neoliberal economic reforms, including the privatization of public enterprises, tax reductions, and lower overall state spending, this type of social-sec- tor reform has resulted in a transferal of most of the country's internal savings to the private sector. The AFPs alone have accumulated funds totaling nearly 25% of the GDP. By the end of the 1980s, they had become one of the principal investment institutions in the country. The privatization of the social-welfare system has been good for business, but it has seriously undermined the efficacy and scope of state social policy as a redistribu- tive tool. In effect, privatization has created a dual wel- fare system, in which a private system with high-quality services for high-income groups coexists with an increasingly underfinanced state system for those who cannot afford private services. As a consequence of privatization, overall state social spending has actually benefited the poorest the least. In 1993, for example, the wealthiest fifth of the population received nearly double the amount of social spending that the poorest fifth of the population received. This distribution of resources is due less to the inefficiencies of targeting strategies than to the high percentage of the government's social budget that is transferred directly or indirectly to the privatized social-service sector. nefficiencies rooted in the persistence of centraliza- tion, bureaucratic inertia, and institutional fragmen- tation within state institutions present further barri- ers to an effective social policy. In fact, despite all the neoliberal hype, the archaic and inefficient state struc- tures of the past have survived both the anti-statist rev- olution of the military government and the modernizing efforts of the post-dictatorship governments. Decentralization, which was initiated during the authoritarian regime and pushed vigorously by the Concertacidn governments, has moved forward, as re- flected in the new targeted social programs. In practice, however, social policy continues to be designed at the level of the central government. Moreover, the heavy centralist legacy seems to reproduce itself at the local level. The absence of well-trained functionaries in local communities has conspired against effective decentral- ization, and has reduced the efficacy of local initiatives. The task of restructuring the state social apparatus is admittedly formidable, given its complexity as well as the existence of entrenched interests that continue to resist change. Despite these fiscal and institutional constraints, the state does retain some leverage. Pinochet's social reforms reduced the state's role in social policy, but they did not wipe it out completely. While the private sector is now largely responsible for financing and directly administering social programs, the state is still responsible for regulating private-sector activities and setting standards. The state also retains the capacity to Vol XXIX, No 6 MAYIJUNE 1996 41REPORT ON SOCIAL POLICY determine which elements of social policy should remain part of the public sphere and which should operate in conjunction with the market. Yet, the Concertacidn govern- ments have made little use of these powers. If the government had established stronger regulations governing private social-service enterprises, many of their most egregious discriminatory and abu- sive practices might have been eliminated. For example, the high operating costs of the AFPs, which cut into the benefits paid to affili- ates, could have been reduced by effective regulation. The state could Inefficient state structures have survived the military's anti-statist revolution and the modernizing efforts of the post-dictatorship governments. have also imposed rules prohibiting the ISAPRES from refusing to treat high-risk patients and costly illnesses. Stricter controls over the transferal of state resources to social-service enterprises in the private sector would have mitigated the imbalance that now exists in Chile between a well-funded private social-service sector and a seriously deteriorated public one. Rules governing mergers and takeovers might have thwarted social- service enterprises becoming virtual oligopolies. These harmful practices are extremely difficult to modify now that they have become entrenched-and more impor- tantly, legally sanctioned. The critical defect of the Concertacidn governments' social policy has been their reluctance to revamp the social- sector reforms implemented under Pinochet. Neither the Aylwin nor the Frei administration proposed modifications in the newly privatized system of social services and the dualism that underlies it. This partly reflects the widespread belief that privatization helped resolve the fis- cal crisis that had characterized the state social-welfare system for decades. At the same time, the Concertacidn govern- ments feared that given the social cost of these reforms, Chilean society would have bristled at the prospect of undergo- ing new structural changes. This continuity with the social-reform model inherited from the military regime undercuts the viability of government efforts to obtain real social equality. By subordinating social programs to the logic of the marketplace, the Concertacidn governments- despite their best intentions-are incapable of countering the widening chasm between rich and poor that the neoliberal economic model itself generates. In this model, the state assumes responsibility for ensuring the subsistence of the poorest by providing them with direct subsidies, but it renounces one of the principal social functions it once fulfilled-promoting a genuine redistri- bution of income.

Tags: World Bank, neoliberalism, Chile, inequality, social policy

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