Social welfare reform in the context of economic-political liberalization: Latin American cases

World Development, Vol. 2.5, No. 4, pp. 497-517,1997 0 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain 0305-750x/97 $17.00 + 0.00

Pergamon

PII: SO305750X(96)00125-8

Social Welfare Reform in the Context of EconomicPolitical Liberalization:

Latin American Cases

CARMELO MESA-LAGO* University of Pittsburgh, USA. Summary. - In the 1980s most of Latin America suffered a fiscal crisis resulting from the heavy debt burden and the halting of external credit, and a deep recession induced by the implementation of stmctural adjustment policies. Both phenomena provoked social costs with divergent degrees of severity. The existing social welfare system (in particular social security) was incapable of coping with the ensuing social costs due to structural and conjunctural causes. The crisis of social security has worsened and most countries in the region have either reformed their systems (mainly pensions but also health case) or are considering laws or engaged in studies of reform. This paper is divided into three sections: (a) a brief assessment of the social costs of economic reform, and the inability of social security to cope with them; (b) an analysis of the divergent models of social security reform in pensions and health care, and their relationship with underlying political and economic models in eight countries (Argentina, Chile, Colombia, Costa Rica, Cuba, Mexico, Peru and Uruguay); and (c) a discussion on future viable types of reform in the region. 0 1997 Elsevier Science Ltd Key words - social welfare reform, economic-political

1. INTRODUCTION

liberalization,

Latin America

autonomy and became universal, centralized and fully financed by the state. The second reform took place in Chile in 1979-8 1 and - based on the neoliberal framework - substituted the public system with a private one, but supported and guaranteed by the state. These two pioneer and antithetical reforms did not have any influence in the rest of Latin America throughout the 198Os, mainly because of their radicalism. The Chilean military-authoritarian political system spread to other countries in South America, but failed to implement both full-fledged economic neoliberalism and social security privatization. In relatively democratic countries, the negative political features of the Pinochet regime precluded any influence of its social security approach. Cuba’s politicoeconomic regime did not propagate to other countries in the region either; furthermore, the collapse of socialism in the USSR and Eastern Europe, the movement to the market in China and Vietnam, and the grave economic crisis suffered by Cuba in the 1990s

In the 1980s most of Latin America suffered a double blow: a fiscal crisis resulting from the heavy debt burden and the halting of credit from industrialized countries, and a deep recession induced by the implementation of adjustment and economic restructuring policies. Both phenomena provoked social costs with divergent degrees of severity and, in most cases, unevenly distributed among various groups in society. The existing social welfare system (in particular social security) was incapable of coping with the ensuing social costs due to structural and conjunctural causes: its restrictive systemic features (such as the usual exclusion of low income groups and the poor, and lack of unemployment insurance or assistance), and the harmful effect of the double crisis on the financial equilibrium of the system itself. Most countries in the region designed and implemented social safety nets (with divergent titles, programs and performance) to help the most vulnerable groups suffering from social costs. The social security crisis has led to a process of reform which often has incorporated the private sector although in divergent degrees. The first reform occurred in Cuba in the 1960s and 197Os, and - based on the centrally planned socialist framework resulted in a total statization of the system that lost its

*The author acknowledges the support of the Social Science Research Council, under the Project “Reform of the State in Latin America and Eastern Europe” directed by Prof. Laurence Whitehead, Oxford University, for the preparation of an initial version of this article, of which the author is only responsible. Final revision accepted: November 2,1996. 497

498

WORLD DEVELOPMENT

eliminated the probability of replicating its reform in Latin America. In the 1990s Chile’s transition to democracy and the Aylwin’s administration endorsement of the previous social security reform (which in the meantime had achieved success in some areas), both legitimized such reform and made it politically palatable in Latin America. In addition, international lending agencies supported social security reform as a key component of a structural adjustment package, and Chile’s privatization approach became an attractive model. By mid-1996, however, no other country in Latin America had adopted a pure Chilean-style reform. But a few countries, which had implemented structural adjustment programs, also reformed their social security systems incorporating an important private component. Argentina and later Uruguay approved a mixed system, made up of mandatory public and private components (but the latter can be administered also by public institutions), while Colombia and Peru established selective systems which allow for choosing between alternative public and private programs. The trend toward democratization in Latin America makes it more difficult to reform social security, particularly in its most radical variants. The overwhelming majority of Latin America still have unreformed public social security systems. A few countries have modified such systems without fundamentally altering their predominant public marginal private nature, although introducing elements. For instance, Costa Rica streamlined its social security system and developed a collaboration with the private sector to improve the efficiency and quality of its health-care program; it also introduced a supplementary pension scheme of a voluntary nature.Mexico created a mandatory supplementary pension program which is basically managed by private banks. In 1993 Brazil was expected to pass

constitutional amendments for social security reform but they had not been approved by mid-1996. Despite the process of economic recovery in most of the region, the crisis of social security has not abated, and several countries (e.g., Bolivia, Ecuador, El Salvador, Guatemala, Panama, Paraguay, Venezuela) are engaged in studies of reform or are considering laws most of them incorporating a private element. It seems certain that such a process will continue in the rest of the l99Os, the question is what type of reform will be chosen, particularly if the current democratization process is consolidated and expanded. This article addresses three issues: (a) a brief assessment of the social costs of economic reform, and the inability of social security to cope with them; (b) a description and analysis of the divergent existing models of social security reform and their relationship with underlying political and economic models in eight countries (Argentina, Chile, Colombia, Costa Rica, Cuba, Mexico, Peru and Uruguay); and(c) an analysis of viable types of future reform in the region.

2. SOCIAL COST OF THE DOUBLE CRISIS AND ROLE OF SOCIAL WELFARE (a) Selection ofcase studies und typology Space limitations impede an analysis of all 20 Latin American countries in this paper. Furthermore, the majority of them have not reformed social security. It was decided, therefore, to select eight countries which have undertaken social security reform (although of different nature and intensity) and are representative of divergent types and degree of political and economic liberalization. Table 1 offers a typology of the selected countries.

Table 1. Typology of case studies* Liberalization Countries

Political

Economical

Argentina

High to Medium

Medium to High {r;y High

Chile Colombia Costa Rica Cuba Mexico Peru Uruguay

{E%?To High High Very High Very Low Medium Medium to Low High

Medium Medium to Low very Low High to Medium Medium to High Low to Medium

Social costs Medium High { Low Medium Very Low High Medium to Low Very High Low

EconomicSocial Recovery

Social Security Reform (Privatization)

Medium

Medium

Very High

Very High

Medium to Low Very High None Medium Very Low Medium

Medium Very Low None Low to Medium Medium to Low Medium to Low

*The time period of the economic reform varies among countries, between the early 1980s and the early 1990s. while the social security reform has occurred in the 1990s. In Chile, however, the economic reform took place in 1974-89 under a military-authoritarian regime (the first row refers to this period) which also reformed social security in 1979-8 I, In Cuba the economic crisis was postponed until the 1990s and timid economic reforms are being introduced; the social security reform was implemented at the beginning of the 1960s.

SOCIAL WELFARE

Politically, Costa Rica and Colombia are stable democracies and Mexico has a stable one-party democracy (at least until 1995). The three Southern Cone countries endured, in the 1970s and part of the 198Os, military-authoritarian regimes (longer in power and stronger in Chile than in the other two), followed by democracies with some limitations (particularly in Chile). Peru has had the most unstable political regime, which has shifted from militaryauthoritarian-populism to democratic-populism and, finally, a democratically elected president who has taken authoritarian powers. Until the 1990s Cuba had a stable authoritarian socialist system but it has become increasingly unstable. Economically, Chile is the pioneer in the implementation of a radical structural adjustment program with shock therapy (within the eight selected countries, Peru also followed this approach). The remaining countries have gradually applied more moderate economic reforms with divergent degrees of intensity. Colombia is a special case, because it followed steady conservative economic policies in the 1980s thus its level of indebtness was low (and the underground economy was strong); because of these factors the crisis was mild. Cuba launched a program of adjustment in the 1990s and began to introduce timid and slow restructuring policies in 1993.

(b) Social costs of the double crisis Indicators of the region’s economic deterioration and social costs in the 198Os, as well as its recovery in the 199Os, are shown in Table 2 for seven countries. (Comparable macroeconomic indicators are not available for Cuba, but an overall evaluation of that country is provided later in this section.) It should be noted it is virtually impossible to separate the effects of the initial (debt) crisis, from those of economic reform. (i) GDP per capita The regional GDP per capita decreased in 1981-90, regressing to the 197677 level. Among the seven selected countries, the decline in Peru and Argentina was two to three times worse than the regional average and it was lower than the average in Uruguay, Costa Rica and Mexico, while Chile and Colombia enjoyed positive growth. In 1991-93 a strong recovery occurred in Argentina, Uruguay and Costa Rica; growth further improved in Chile (but slowed down in Colombia); and a modest recovery began in Mexico and Peru. All countries, except the last two, performed better in this indicator than the regional average. (ii) Injlution The regional average rate of inflation increased 26 times in 1981-90. The country cases most affected

REFORM

499

were Argentina and Peru who suffered hyperinflation, and inflation was also high in Uruguay and Mexico; in the remaining three countries inflation was moderate. Most affected by inflation were the lowest income groups, particularly in urban areas. By 1993 inflation in the seven countries had been reduced well below the regional average, but still was relatively high in Peru and Uruguay. (iii) Real wages Real minimum wages, mostly in urban areas, declined in 1981-90 in all countries except for Colombia; the decrease in Costa Rica, Chile and Uruguay was more moderate and it was worst in Mexico and Peru. The 1980 minimum wage level had been surpassed by 1993 in Costa Rica, Colombia and Chile; but in Uruguay, Argentina, Mexico and particularly Peru it was well below the 1980 level. The average real wage also declined in the 1980s but not as badly as the minimum wage, and the former’s recovery in the 1990s has been stronger (ECLAC, 1993b, 1994). (iv) Unemployment The open unemployment rate in urban areas rapidly increased in 1981-90, with the highest rate registered in Chile, followed by Colombia and Uruguay; Costa Rica and Peru had medium rates, and Mexico and Argentina relatively low rates. Although unemployment declined in the second half of the 1980s and early 1990s the regional average rate in 1993 was still above the 1980 level. In Argentina the rate continued its increase; in Peru it was stagnant; in Uruguay it declined sharply but was still above the 1980 rate; Colombia’s rate was still high but below that of 1980; and the rates of Mexico, Costa Rica and Chile were low and below the 1980 level. The open unemployment rate in the 1980s would have been higher if it were not for an expansion of informal employment and underemployment in that period. (v) Poverty and income distribution The poverty incidence for the population of the region increased in 1980-91 (ECLAC, 1993a). Among the selected countries, the highest incidences (urban/rural) in the second half of the 1980s were found in Peru, Colombia and Chile, while the lowest were in Uruguay, Costa Rica and Argentina. In 1980-90 the incidence declined in Colombia and Chile, increased and then declined in Costa Rica, and increased steadily in Argentina, Mexico and Peru. The scarce data available on income distribution (Gini coefficient in urban areas for five countries) indicate a deterioration in Argentina and Mexico, a worsening and then improvement in Costa Rica and Uruguay, and a deterioration in Colombia. The lowest Ginis were found in Costa Rica and Uruguay and the highest in Colombia and Mexico.

4 -29 -3

-9

Mexico PerU Uruguay

Averagell

4

1 2 12

21 19 5 8

1991-93

56

30 60 43

88 31 26 18

1980

n.a.

159 7,650 83

4,923 21 32 27

1981-90t

Inflation Rate (% Dee-Dee)

887

8 40 53

8 12 23 9

1993

n.a.

46 23 69

40 69 99 86

67

42 1611 52

49 105g 106 113

Real Minimum Wage* (1980= 100) 1981-90t 1993

7

4 7 7

3 12 10 6

1980

n.a.

7 10 16

8 20 14 IO

1981-907

Urban Unemployment (% of Labor Force)

8

3 10 8

10 4 9 4

1993

30

n.a. 35 9

7 “.a. 36 16

U

1980

60

n.a. 65 21

16 n.a. 45 28

R

36

23 45 14

R

60

43 64 23

17 45 42 28

1984-87

12 37 36 21

U

39

30 n.a. 10

25 34 35 22

61

n.a. ma. 23

n.a. 36 ma. 25

1989-90 U R

Poverty Incidence (% of Households)

n.a.

n.a. ma. 0.379

0.365 n.a. 0.518 0.328

1980-81

n.a.

0.432 n.a. 0.385

0.406 “.a. 0.455 0.364

1986-88

n.a.

0.504 n.a. 0.368

n.a. n.a. 0.450 0.345

1989-90

Gini Coefficient (Urban Households)

Source: Mesa-Lag0 (1994a, 1995),updatedaodexpanded with ECLAC (1992a. 1993a, 1993b. 1994). *Mostly in capital city or urban areas; national in Argentina and Uruguay. tWorst point in the crisis. $The Chilean economic reform began in the mid-1970s, and there was a first crisis in 1975 followed by a strong recovery in 197681, the second crisis occurred in 19X2-83 and it was followed by a steady recovery thereafter. gThe peak of 1981 was 116, still unsurpassed by 1993. 111992. YECLAC based on: 33 LAC countries for GDP p/c, 22 LAC countries for inflation, and 10 countries for poverty incidence; author’s unweighted arithmetic average based on: 1 I LA countries for real wages, and 17 countries for unemployment.

-20 12 18 -5

Argentina Chile* Colombia CostaRica

1981-90

GDP Per capita (Cumulative %)

Table 2. Economic and social costs of the double crisis and the recovery in seven case studies: 1980-93

z

s

S

z

SOCIAL WELFARE REFORM

(vi) Public social expenditures Public expenditures in social services were cut particularly in the first half of the 1980s hence afflicting the most vulnerable segments of the population. Data available for six of the selected countries show that in Chile, Mexico and Peru the share of central govemment expenditures in social security, health, education and welfare was considerably lower in 1989 than in 1972, while it was stagnant in Uruguay, and increased in Argentina and Costa Rica (World Bank, 1991). Although most overall health indicators continued improving in the 1980s there is evidence of worsening among vulnerable groups of the population and on specific illnesses (Mesa-Lago, 1992). (vii) A special case: Cuba’s performance Cuba was largely protected from the 1980s regional double crisis by the Soviet umbrella (huge USSR and CMEA economic aid under very generous terms), while its centrally planned system emphasized equitable distribution and protection of low-income groups. In the first half of the decade the island enjoyed high rates of economic growth, relatively low open unemployment, repressed inflation, increasing real wages and egalitarian distribution. In the second half of the 1980s however, Cuba launched an antimarket program that negatively affected growth and real wages, and in the early 1990s the collapse of socialism and disappearance of the CMEA terminated the Soviet umbrella. A grave crisis ensued in Cuba in 1991-93: the national product (GSP) decreased as much as 50%; excess money in circulation (a subrogate indicator for inflation) amounted to 80% of the population’s total income; the exchange rate of the peso to the dollar deteriorated from eight to 100 (the average monthly wage in the black market was equal to US $2); as much as 18% of the labor force was displaced from their jobs; and the excellent social services rapidly deteriorated (Mesa-Lago, 1993a, 1993b). (viii) Country ranking on social costs and the recovery A ranking of the performance of the case countries, both in terms of social costs in the 1980s and the recovery of the 199Os, is presented in Table 1. Social costs have been very high in Peru; high in Chile and Cuba in the 1990s; medium in Colombia, Argentina and Mexico; low in Uruguay; and very low in Costa Rica. The recovery has been: high, both in economic and social indicators, in Chile and Costa Rica (in the latter, better in social, in the former, better in economic); medium in Argentina (high in economic but low in social), Mexico (low in growth, minimum wage and poverty), and Uruguay (low in inflation and minimum wage); medium to low in Colombia; and very low in Peru (virtually in all indicators). Cuba has suffered from both economic and social deterioration at least until 1994.

501

Social costs have not been equally distributed among various sectors of society. Capital and business have mainly benefited from economic reform, but labor and the poor (also the aged and women) have mostly suffered from the effects of that reform, e.g., rising unemployment, shrinking real minimum wages and pensions, increase in prices of essential consumer goods, reduction in social services, expanding poverty and income inequality. The neoliberal rationale is that such policies are necessary to put the economy on solid ground so that, eventually, it generates high rates of growth, productive employment and income. But even when those results are accomplished, there is no justification for placing the brunt of the burden on labor and the poor. Furthermore, not always have the benefits of recovery improved the condition of vulnerable groups. A comparison of the two countries, which have had the best performance in the recovery, shows important differences. In Chile - which applied the most radical neoliberal economic reform and used shock therapy - the transition took approximately 10 years, social costs were high, and mostly imposed on labor and the poor. Such radical policies were possible because of the authoritarian nature of the regime, and their negative effects were partly associated with the excessive rapidity, depth and errors of the regime policies. But the ultimate outcomes of the Chilean reform - in economic growth, employment creation, real wage recovery - have been very good. In Costa Rica - which applied a moderate gradualistic approach the length of the transition was considerably shorter than in Chile, social costs were lighter, and their burden was more equitably distributed. Furthermore, the Costa Rican recovery has surpassed or matched the Chilean performance in all indicators except on growth. A strong democracy and the role of compensatory policies have been important in achieving those outcomes (Whitehead, 1993).

(c) The role of social welfare in alleviating social costs Social welfare, in a broad sense, encompasses social insurance, social assistance, health care, education, housing, employment programs, consumption subsidies and similar public services. Due to space limitations we focus herein on social security, embracing social insurance, social assistance, and public health care. (i) Social security systems: Overall differences among countries The magnitude and timing of the social security crisis in Latin America largely depended on the age and degree of evolution of their systems. The oldest and most developed systems (in “pioneer” countries such as Chile, Uruguay, Argentina, Brazil and Cuba

502

WORLD

DEVELOPMENT

which introduced their systems in the 1920s and 1930s) were the first to be afflicted by financial disequilibrium because of their high costs and insufficient revenue.These systems covered virtually the countries’ entire populations, had liberal entitlement conditions and generous benefits, their pension schemes were mature. There was an aging process of their populations (hence, the ratio of contributors to pensioners was low), reserves were virtually depleted and, hence, they functioned on a pay-as-you-go financial method. Payroll contributions were so high that they could not be further increased, and the state had to subsidize the system. A second group of countries, in an “intermediate” stage (rest of South America - including Peru - as well as Mexico, Costa Rica and Panama) established their systems from the 1940s to the mid- 1950s) and had a more stable financial situation. The majority of their populations was not covered (with the exception of Costa Rica), their pension schemes had not yet matured, they benefited from growing reserves, were based in partial capitalization methods, and had younger populations and, hence, a higher ratio of contributors to pensioners. The rapid universalization of coverage in Costa Rica, as well as high costs of its system, made it similar to the pioneers’. The last group of countries (“latecomers,” including the rest of Central America, the Dominican Republic and Haiti) founded their systems from the mid-1950s to the early 1970s and experienced the best financial situation: their pension schemes were the newest and most of them endured stricter entitlement conditions and benefits; their populations were the youngest and the ratio of contributors to pensioners the lowest. But only a small minority of these countries’ population was covered by the system. In summary, the pioneer countries had solved the problem of coverage but faced severe financial problems, while the intermediate and, particularly the latecomers, covered a minority of their populations but were in better financial shape. Differences in the extension of coverage among countries were largely a result of their level of development and composition of their labor force: those with the largest urban, salaried, formal sectors had the widest coverage, while those with the widest rural, nonsalaried (self-employed, unpaid family workers), informal sectors had the smallest coverage. The traditional Bismarckian model of social insurance (financed by tripartite payroll contributions) was capable of extending coverage in the most developed countries but not in the less developed. Political commitment and innovations in social security allowed a few countries in the intermediate group to virtually cover their entire populations (Costa Rica) or at least significantly expand protection in rural areas (Mexico). Finally, the better financial situation of social security in intermediate and latecomer countries hid inner flaws of their systems (which were largely cast in the mold of the pioneers), thus, the most

advanced within the intermediate group began to confront difficulties. Social security in Uruguay and Costa Rica alleviated some social costs of economic reform in the 1980s because they have universal coverage, as well as social assistance programs (which protect indigents) fairly well integrated with social insurance (Uruguay also has unemployment insurance). But in the overwhelming majority of the remaining countries, social security did not compensate for social costs, because it excludes from coverage the most vulnerable groups affected by the economic crisis and lacks social assistance schemes. (ii) The 1980s crisis adverse effects on social security The double crisis of the 1980s aggravated the financial disequilibria of the pioneer systems and accelerated the latent crisis in most countries in the other two groups. The economic crisis had the following negative effects on social security: decline in revenue, increase in some expenditures, deterioration of the financial and actuarial disequilibria, and reduction in coverage and benefits. The crisis brought increased unemployment and labor force informality, these, in turn, reduced population coverage (e.g., 3 pp. in Mexico, 5 pp. in Chile, 10 pp. in Costa Rica and Uruguay), as neither the unemployed nor informal workers were covered by social security; barriers to the extension of coverage in less developed countries became even more formidable. Skyrocketing inflation had pervasive effects on both social security revenue and expenditures: real wages and payroll contributions shrunk; employers delayed payment, deposited due contributions in banks (whose interest rate was higher than the rate charged for late payment) and paid their social security obligations later with a devalued currency (evasion was 30% in Argentina, 40% in Peru and 50% in Colombia); the average real annual investment yield decreased or became negative (e.g., -10% in Costa Rica, -2 1% in Mexico, -29% in Peru) because principal and interest were not indexed; and salaries of social security personnel and overall pensions (tied in some countries to inflation) rose, as well as the cost of imported medical equipment and drugs. The govemment, under pressure to service the external debt, did not pay or delayed the delivery of its contributions in several countries, and when eventually paid its debt if at all - it did so with a devalued currency. In the few countries where social security includes unemployment compensation and social assistance, the insured who lost his/her job ceased to be a contributor but began to draw unemployment or welfare payments. Declining revenues and growing expenditures led to worsening of the deficit in the pioneer countries, and the end of surpluses or the beginning of financial disequilibria in some intermediate and latecomer countries (actuarial imbalances obviously became

SOCIAL WELFARE REFORM

worse). Under pressure to restore the equilibrium, many systems allowed the real value of pensions to erode (e.g., -11% in Colombia, -31% in Uruguay -46% in Costa Rica, -66% in Mexico), halted or curtailed investment in health-care facilities and equipment, and let the quality of health services deteriorate. But pressure from the pensioners in pioneer countries (Argentina, Uruguay) forced the government to readjust pensions to the cost of living and/or retroactively pay the difference between the eroded pension actually paid and the value of the adjusted pension legally set. These actions aggravated the deficit and forced higher taxes or state subsidies. At the beginning of the 1990s the need for social security reform became evident in most of the region (Mesa-Lago, 1994a). As we have noted, the economic crisis was postponed in Cuba until the 199Os, and social security kept covering virtually the entire population. Furthermore, an unemployment compensation program was introduced to help displaced employees in state enterprises shut down due to the crisis. But as the economy deteriorated, social security revenues declined while its expenditures grew, hence, the burden of the welfare system became heavier (as much as 26% of GSP in 1992) and its deficit worsened (Mesa-Lago, 1993b, 1994~). (iii) Social sufe?y nets The inability of social security to cope with rising social costs led to the creation, since the mid 198Os, of social safety nets (SSN) in most of Latin America. Politics played a key role in the creation of SSNs: the implementation of structural adjustment demanded rapid and efficient state action to aid vulnerable groups in the transition and thus elicit their support or, at least, assure their neutrality. For example, elimination of price subsidies of essential consumer goods required policies to cushion its negative impact on the poor, and growing unemployment made necessary the creation of emergency employment programs. The democratization trend in the region increased popular pressure on the government: public demonstrations and riots occurred in capital cities such as Buenos Aries, Caracas and Santo Domingo. Public protests in Santiago de Chile contributed to the introduction and expansion of employment programs in that country. The first SSN was established in Bolivia in 1986, after seven consecutive years of negative growth rates, the worst hyperinflation in Latin American history, and a record open unemployment rate. Mexico’s SSN was launched in 1989, after the hegemonic party’s (PRI) worst electoral performance in its history, largely caused by cuts in social services, and three consecutive years of GDP per capita decline. Eight of 14 SSNs in Latin America were established in 1990, the year that the World Bank published its report on poverty. Two-thirds of the laws which created SSNs in the region mentioned social costs of economic reform as a principal cause to adopt that program.

so3

3. MODELS OF SOCIAL SECURITY AND ITS REFORM (a) Social security features in the country cases Space limitations preclude a detailed analysis of the situation of social security in each of the eight case studies. Table 3 summarizes the features of the systems and ranks them according to their degree of develop ment and burden: as lowest the rank heavier the burden and vice versa. The worst case is Cuba because it has: one of the oldest and most matured pension schemes, protection against most risks, the highest population coverage, the biggest pension share, the lowest age of retirement but the highest life expectancy. a fairly high adjustment of benefits to the cost of living, and the second highest system deficit and state subsidy. Conversely, Cuba has the lowest payroll contribution, a major cause for its disequilibrium. It should be noted that Cuba had its social security reform in 1959-79 but it resulted in an increased rather than a reduced burden. Closely after Cuba come the other three pioneer countries: Uruguay is virtually tied to Cuba, while Chile and Argentina lie somewhat behind. A significant difference between these three countries and Cuba is their considerably higher payroll contribution and, in the case of Chile, a much higher age of retirement (resulting from the reform, which did not significantly change other variables in the table). Costa Rica ranks quite close to Argentina, in the middle of the continuum: its system shares more features of the pioneers, but its pension scheme is the second newest and, hence, its pension share is among the lowest; partly because of these factors its balance is the best. The remaining three countries (Colombia, Mexico and Peru) are in the intermediate group. They have newer pension schemes, less risks protected, lower population coverage, smaller pension shares. lower life expectancies, and the smallest burden on GDP; but their administrative costs are the highest.

(b) The relationship between politico-economic liberalization and social securiv reform In Latin America there is a positive relationship between the degree of economic liberalization and the level of privatization in social security reform. Low degrees of economic liberalization are associated with more public, less reformed social security systems and vice versa. Political liberalization appears to be inversely related to social security privatization: the more democratic the political regime is, the less possibility of introducing a full privatized social security system. The second relationship, however, appears to be weaker than the first (see Table 1). The extreme cases in the typology are Cuba and Chile. The former has the most centralized and

1930s

1924

1945

1943

1920s

1941

1936 1920s

Argentina

Chile

Colombia

Costa Rica

Cuba

Mexico

PeIU LJlllglJay

P, S-M, OH P, S-M, OH, UC, FA

P,S-M,OH

UC

P, S-M, OH, UC, FA P, S-M, OH, UC,FA P, S-M,OH, FA P, S-M, OH, FA P, S-M, OH,

Social Risks Covered 1991

22 72

54

9511

83

21

8611

80

Population Coverage (%) 1988-91

23 3crsott

21

10

36

19-24tt

22-28**

56

Payroll (%) Contribution 1990

34 82

30

85

21

40

71

80

Share (%) of Pensions in Total Exp. 1986-91

55160 55/609§

65

5o/fxl

5515719

55160

60165

55/60

1990

“l&S)

Retirement Agest (females/

64 73

70

76

76

69

72

71

1991

(Yeah

Life Expectancy at Birth

33 107

80

lOOlf¶l

94

55

106

62

1986

Real Benefit Value (1980=100)

__.-_-----

-

- .,. .” _

.- - - - - _ ,.,, _

52 6

17

“A.

4

42

7

2

1986

Administrative cost as % of Total Exp.

3. Features of social securiry in case studies prior to the reform: 198691

Source: Mesa-Lago (1992,1993b, 1994~1). P = Pensions, S-M = Sickness-Maternity, OH = Occupational Hazards, UC = Unemployment Compensation, FA = Family Allowances. *Cuba’s reform took place in 1959-79, while Chile’s was in 1979-81, hence, table data in these two countries are after the reform. tGenem1 system; virtually in all countries there are lower ages for those in special regimes. *Life expectancy at the age of retirement is considerably higher. $Cou”tries raked by arithmetic average of rankings in 12 variables, for the heaviest (1) to the lightest (8). gout of pension expenditures only. IIEAP. **Private and public system. ttDifferent schemes. SSCAJANAL, no subsidy for ISS. @Initial age was 65 f?r both sexes in Costa Rica and 45/50 in Uruguay. IlllRough estimate by author. II IIGSP.

(Yew)

countries*

Scheme

Creation of First Pension

Table

._ - .,. -

2 14

3

1011II

7

2

13

13

198691

Total Exp. as % of GDP

-

I^

0 -6

0.5

-6

1

-1

-8

-2

1982

Balance of System (% GDP)

0 28

“.a.

41

“.a.

67$$

60

3511

state Subsidy as % of Total Exp. 1988-90

70 32

68

31

48

63

38

43

8 2

7

I

5

6

3

4

Ranking by Degree of Dev’t. and Burdens Score Rank

E

z

5

g

505

SOCIAL WELFARE REFORM collectivized economy of the region (although timid market-oriented reforms began in the 1990s). an authoritarian socialist regime, and a totally public social security system. Costa Rica, one of the most democratic countries in the region, introduced moderate economic reform and retains a public social security system although it marginally collaborates with the private sector in health care. Mexico appears as an outlier in the typology, because it has advanced more in economic liberalization than Costa Rica but maintains a public social security system. In 1992, Mexico established a mandatory supplementary pension program administered by banks and insurance companies (in 1995 Mexico approved the general guidelines of a structural reform). Argentinean democracy was largely restored in 1985 and economic liberalization has been implemented in the 1990s and has advanced; a pension reform approved in 1993 follows a mixed approach (combining mandatory public and private components) but the health program remains untouched. In Uruguay, the first two democratic administrations after 1985 implemented moderate adjustment policies but little economic restructuring; an attempt to reform the pension program (with a mixed type) failed in 1992 but was eventually passed in 1995 at the beginning of the third democratic administration. Colombia has a democracy and has applied moderate economic liberalization; but its social security reform, also passed in 1993, is selective: the insured can choose between the public and private programs. Peru’s democratically elected president orchestrated a coup in 1991 and took authoritarian powers that facilitated the enforcement of structural adjustment; its social security reform, enacted in 1992, also follows the selective approach but is relatively closer to the Chilean model than Colombia’s Chile had the toughest and longest military authoritarian regime in the region, which pioneered the strongest economic liberalization program and the most radical privatization of social security. The following sections analyze the various types of social security reforms (or their lack of it) in the eight case studies. The countries are classified mainly based on their pension programs (although health-care reforms are briefly discussed when pertinent) as follows: public basically unreformed systems (Cuba, Costa Rica and Mexico); substitutive private system (Chile); mixed systems (Argentina and Uruguay); and parallel or selective systems (Peru and Colombia). For a comparison of the major features of the reform see Table 4.

(c) Public basically unreformed

systems

Three countries, Cuba, Costa Rica and Mexico maintain public social security systems, which either have not been reformed yet (Cuba) or have incorpo-

rated marginal private elements (Costa Rica in health care and Mexico in pensions). (i) Cuba Overall situation and problems: Prior to the Revolution of 1959, Cuba had one of the most developed social security systems in the region, but it was extremely stratified (there were 54 separate independent pension funds with significant differences in benefits and entitlement conditions), it lacked health-care insurance (but there was an extensive network of mutual-aid and cooperative clinics), most of the rural sector was unprotected, the majority of funds suffered acute disequilibria, and state subsidies had a regressive effect. Powerful interest groups enjoyed the best schemes and successfully resisted the reform. Pension reform: In 1959-63 the 54 existing pension funds were unified and their entitlement conditions standardized except for the armed forces which kept a privileged separate program. The whole system is unified, centralized and administered by the state; coverage is universal although a small proportion of the labor force is not covered. The employers pay a 10% payroll contribution and the state covers any resulting deficit; there are neither reserves nor even a fund; but all contributions are taken by the state which annually allocates a sum in the state budget. Health-care reform: All mutual-aid, cooperative and private health-care facilities were expropriated in 1961 and merged under the ministry of public health which administers the entire system. Health care is universal, gratuitous, fairly egalitarian and entirely financed by the state out of general revenue (all physicians and medical personnel are state employees and private practice is prohibited). Flaws

of the reform

and impact

of the crisis:

Rather than reducing expenditures, the reform greatly expanded them and, at the end of the 198Os, Cuba had the most comprehensive, generous and costly social security system in Latin America. Entitlement conditions for pensions were very flexible (e.g., retirement ages of 55/60 for female/males which led to average pension years of 25 and 19 years) and were further liberalized in the 1990s to cope with rising unemployment. At the end of the 1980s health indicators in Cuba were the best within the region. Social security expenditures as a percentage of GSP reached 10% in 1990; as these expenses continued growing, but GSP declined by as much as one half in 1991-93, that proportion probably reached 26% by 1993. On the other hand, Cuba’s payroll contribution is one-fourth of the average contribution in Latin America. In 1990 the social security system had a deficit of 41% which was financed by the state, such deficit must have risen in the 1990s. The grave economic crisis of the 1990s has forced the introduction of adjustment measures and provoked a drastic erosion of Cuba’s social security benefits,

-.

1993

1979-81

1993

1991-92$

1992$

1992

1995

Argentina

Chile

Colombia

Costa Rica

Mexico

Peru

Uruguay

Mixed

Selective

Public9

Publicg

No Change, Public

No Change, Publid No Change, Public Selective**

Selective

Selective

No Change, Public

Mixed

Private Substitutivet Selective

Health

Pensions

Increased77

Increased

N.A.

N.A.lI

Increased

Reduced

Same

Insured

-

,^

-.

_ _ _~ ._ ,, -. _. - -

_,_..

_

Deficit Public

None

N.A.

N.A.

Deficit Public Deficit Public

VAT, other taxes

Taxes, Deficit

_

___

__

_.--

~_ ..,,

.---

sources.

- ^. ._

AFAP Multiple

AFP Only S .A.

Legal but not being paid

Yes, paid by public scheme

N.A.

N.A.

AFP Only S.A. SAFP Multiple

AFJP Multiple

Administrators

N.A

Yes, paid by state Yes, paid by state with limits N.A.

Yes but paid by public scheme

Minimum Pension

and with different financing

Ceiling, no interest, need previous contributions (paid by public scheme) None

N.A.

Ceiling, no interest (paid by public scheme) No ceiling, pays fixed interest Ceiling, interest, need previous contributions N.A.

Recognition Bond

State Financial Support

in Costa Rica it is voluntary

Reducedtt

Eliminated

N.A.

N.A.

Increased

Eliminated

Same

Employer

Payroll Contribution

Features of Pension Program

of social security reform in case studies: 1993-95

Sources: Mesa-Lag0 (1995). *Cuba’s public system has not been reformed since 1959-79. told system is closed. $Not structurally reformed. $In Mexico there is a mandatory supplementary pension financed by the employer; TMarginal collaboration with private sector. 1IN.A. = not applicable. **Not regulated and operational yet. WPercentage contributions are based on three salary brackets.

Year of Reform

Countries*

Type of Current System

Table 4. Characteristics

Two per year

No limit

N.A.

N.A.

Two per year

No limit

Two

Change of AFPs

5

m

s

b

B E;

+

SOCIAL WELFARE

both in quantity and quality. The monthly average pension equals less than US$l in the black market, and rationing monthly quotas scarcely provide food for two weeks, hence the rest must be bought in the black market in dollars. The absence of 300 medicines and severe scarcity of soap, detergents, insecticides, and food have damaged health standards and nutrition. In 1993,50,000 people suffered from optic myelo neuropathy caused by vitamin deficiency. The elderly is also particularly afflicted by lack of transportation (bus trips in the capital have been cut to one-tenth) and electricity, as well as their physical inability to stand in long queues for hours to buy the few available goods. In 1991 Cuba began to open its economy and shift its foreign trade to the world capitalist market, while introducing adjustment policies. In 1993-95 several domestic market-oriented measures were implemented: legalization of possession and circulation of dollars; authorization of 160 self-employed occupations; transformation of state farms into cooperatives and reintroduction of free agricultural markets; tax reform; and a new more flexible foreign investment law. Announced but not yet introduced measures are: elimination of enterprise and price subsidies, massive dismissals of unneeded workers, taxes on salaries and social security, and convertibility of the peso (Mesa-Lago, 1985,1989,1993b, 1994~). Politics of the reform: The radical Cuban reform was feasible because of the enormous power of the state, but still it took more than four years and the control of trade unions and professional associations, to overcome pressure groups and unify the system. The crisis of the 1990s is reversing the progress achieved in the previous 30 years, but the government faces serious socio-political obstacles to raise contributions and tighten entitlement conditions. (ii) Costa Rica Overall situation and problems: The universalization of coverage to the population was mandated by the constitution and achieved in the 1970s: all hospitals of the ministry of health were transferred to the social insurance institute (CCSS) and the ministry expanded primary health care to marginal rural and urban groups; non-insurance indigents became covered by CCSS (both on pensions and health care) under social assistance programs either financed by the state, or by payroll contributions. The integration of CCSS and the ministry’s health program was further advanced in the 1980s and 1990s. Total population coverage on health care (combining CCSS insurance and social assistance) reached 83% in 1987 and it was virtually universal when adding the ministry’s services. (Costa Rica’s health standards are similar to those of Cuba despite the fact that the former’s health status at the end of the 1950s was considerable lower than in the latter). Although only half of the labor force was covered by pensions, most of

REFORM

507

the other half was protected by social assistance pensions. Pension benefits and entitlement conditions were very generous. For instance, the minimum ages for early retirement were reduced from 65, for both sexes, to 55/57 for females/males, while life expectancy increased from 65 to 75 years; and 19 independent pension funds for civil servants enjoyed even lower ages of retirement and received significant state subsidies. Social security expenditures surpassed 7% of GDP in 1986; to cope with those costs, payroll contributions were increased to 36% (the third highest in the region). Pension reform: Reforms introduced in the late 1980s and early 1990s were not structural but aimed at saving the CCSS: minimum ages for early retirement were increased to 60.5/62.5 for females/males; the costly independent pension programs were “closed” (an attempt to incorporate teachers in 1995 was strongly resisted by a national strike of teachers who eventually had to yield) and all newly appointed civil servants are now covered by the CCSS and their entitlement conditions have been standardized; payroll contributions were further increased; an emergency program reduced administrative expenditures (but wage increases of personnel more than offset such cuts); the state signed agreements to pay its debt with CCSS (although reduced its contribution as third party); and in 1987 real pensions were increased 11 percentage points above the 1980 level. Supplementary pension schemes of a voluntary nature are administered by the state insurance agency, two state banks and three private corporations; a legal draft to make this scheme mandatory has been under discussion for some time. Health-care reform: There has been increasing collaboration of the CCSS sickness-maternity scheme with the private sector. Five programs launched since 1983 combine complex services and medicines supplies by CCSS with consultation services provided by enterprises or individual physicians or cooperatives associated with the CCSS. Although less than onefifth of the insured benefit from these programs, most of them reportedly have reduced costs and improved efficiency and quality of services. In 1992 a neoliberal government designed a comprehensive reform that involves further integration of the CCSS and the ministry of health facilities, transfer of resources from the latter to the former, and decentralization and more competition (Gtiendel and Trejos, 1994; Mesa-Lago. 1994a, 1995). Politics of the reform: The rapid development of social security in Costa Rica has been largely the result of a stable pluralistic democracy for almost 40 years, and the dominant role of a social democratic party (PLN) committed to social welfare (without strong opposition on this issue from other parties). The reforms described above were introduced by the PLN to save the system. The 1990-94 neoliberal

508

WORLD DEVELOPMENT

administration initially proposed further privatization of social security but did not accomplish that goal because of PLN opposition. The latter returned to power in 1994 and began to introduce the health care reform and study further pension reforms. (iii) Mexico Overall situation and problems: The principal social security institute is the IMSS, there are independent schemes for federal civil servants, armed forces and petroleum, with better benefits and higher state subsidies. Population coverage in IMSS increased very slowly in the first 30 years but, in the 197Os, a social solidarity scheme rapidly extended primary health-care protection to isolated poor rural areas and, to less extent, marginal urban areas. Population coverage (including IMSS and the independent schemes) rose from 24% to 54% in 197090, largely due to the rural solidarity scheme. The latter, however, was split in 1985: half of it was transferred to the states and the other half maintained by IMSS which resumed its growth since 1989. IMSS is financed by a payroll contribution of 21%; the state contributes a small fraction to the general program but has financed most of rural solidarity. Administrative costs were 17% of total expenditures in 1986, high by international norms. IMSS entitlement conditions are relatively stricter than in the rest of the region, (e.g., the retirement age is 65 for both sexes), but benefits were liberalized without increasing the contribution in 50 years. The sickness-maternity program suffered a deficit since its creation, except for three years; such deficit was covered with surpluses from the other IMSS schemes (particularly pensions) thus contributing to their decapitalization. Social security expenditures as proportion of GDP am relatively low, less than 3%. Nonstructural reforms; pensions and health care: At the beginning of the Salinas administration there were discussions on privatizing part of IMSS or at least collaborating with the private sector in health care; the final decision, however, was to strengthen the IMSS and add a private component in pensions. A series of measures aimed at partially compensating the social costs of adjustment: a raise of real pensions since 1989 (pensions had shrunk by 66% in 1980-88); expansion of health care to the unemployed from six to 26 weeks; increase of emergency care for the noninsured; and provision of health care to pensioners with a permanent-partial disability. But cost-reduction measures to offset such increases in expenditures were few and grossly insufficient; the result was a shrinking financial surplus, and this forced increases in payroll contributions: 33% in the sickness-maternity program in 1989 (but still insufficient to assure equilibrium), and another 33% in the pension program in 1991-96 (to equilibrate the pension scheme, however, the contribution had to be increased by 100% in 1991-2011).

Pension reform: In 1992 a law established a mandatory supplementary pension program for all those insured in IMSS. Employers mandatorily contribute 2% of the payroll (the insured can add voluntary contributions), which is collected through the banking system responsible for opening and maintaining individual accounts for the insured. All funds, however, must be deposited in the Bank of Mexico and invested in treasury bills. Deposits in the individual accounts are adjusted to the price index and exempted from taxes, and must earn a real interest rate no lower than 2% yearly. The insured have access to the accumulated fund when reaching 65 years of age or becoming entitled to an IMSS pension. The law considers the possibility that the individual fund could be transferred to private investment corporations to increase its yield. At the end of 1994 SAR covered 12 million insured, had accumulated US $8,758 million and its real yield averaged 5%, but the severe crisis at the start of 1995 probably turned that yield negative (Mesa-Lago, 1989, 1992, 1994a, 1995). At the end of 1995, President Zedillo submitted a legal draft to Congress to structurally reform the IMSS pension program. The law, enacted on December 21, 1995 and which should start to be applied in 1997, introduced a structural reform in the old-age pension program, although another law and regulations must be previously enacted to make it operative. The pension for old age and dismissal at advanced age is taken away from the IMSS and its administration given to public, private and social corporations (AFOREs) similar to those of Chile (although not exclusively private). The age of retirement is unchanged in the new system but the years of work/contribution are increased from 10 to 24. The contribution percentages are unchanged for the insured and employers but somewhat increased for the state, although it is difficult to compare the contributions in the old and new system. Current insured (and their beneficiaries) are entitled to select between the legal conditions of the old and new system, but future insured will be mandatorily covered by the new system. Pension funds accumulated in the old system (as well as savings at SAR) will be transferred to the AFORE freely selected by the insured (SR will not be allowed to receive deposits after the new law is enforced). An insured who decides for the legal conditions of the old system but retires when the new system is operational, will receive the IMSS pension plus the devolution of all funds accumulated in the new system. Those insured in the new system can choose at the time of retirement among: an annuity contracted with an insurance company (private, public or social); a programmed pension arranged with the AFORE; and a programmed pension first and an annuity later. The Federal Government will guarantee a minimum pension equal to one monthly minimum salary and

SOCIAL WELFARE REFORM

adjusted annually to the consumer price index in the new system; it will also finance all current pensions as well as those which will be granted to those insured under the old system. A National Commission for Retirement Savings will enact the needed regulations and supervise the new system (Congreso de1 Trabajo y Consejo Coordinador Empresarial 1995; “Ley de1 seguro social,” 1995). Health-care reform: The IMSS health care scheme has not been reformed and is in need of coordination or integration with other social insurance programs, and public health services of the federal government and the states. Although a national health system was legally established at the end of the 1980s it has not materialized. Politics of the reform: Mexico’s dominant party (PRI) introduced and expanded social security from 1941 until the end of the 1980s based on is power and control of unions and opposition. The economic crisis of the 1980s combined with PRI erosion of power and the new crisis of 1995, made impossible to continue with the old system and prompted the pension reforms of the 1990s.

(d) Substitutiveprivate system (i) Chile Overall situation andproblems: At the start of the 1970s Chile’s social security protected all social risks, covered 76% of the labor force (but provided social assistance pensions and health care to those noninsured), and offered generous benefits. But it was highly stratified (made up of more than 100 independent schemes), lacked coordination, allowed unjustified privileges and inequalities, required a payroll contribution of 65%, had expenditures equal to 17% of GDP (the last two hemispheric records), suffered financial and actuarial disequilibria, and required the state to subsidize 29% of its costs. Powerful pressure groups gained concessions from successive govemments and blocked the badly needed reform of the system. Pension reform: Most salient inequalities were eliminated in 1979 and a process of unification and standardization of the multiple pension funds took place in the 1980s (e.g., retirement ages were uniformly set at 60/65 for females/males), but the armed forces were excluded from the reform and still maintain their privileges. A new pension system with uniform conditions for all insured began to function in 1981. It is based on the neoliberal ideology, assigns a “subsidiary role” to the state, entrusts its operation to private competing corporations of exclusive dedication (AFPs), is regulated and supervised by a state agency, and counts with substantial government guarantees and subsidies. The old public system was “closed” (new affiliations are not allowed) and the

509

insured were given five years to decide whether to stay in it or move to an AFP of their choice; a strong incentive to move was a cut in the insured’s contribution in the new system, combined with a publicity campaign; the old system will disappear in 30-40 years when all its beneficiaries die. The new system is fully funded and individual; the employer contribution was eliminated and only the insured contributes. Mandatory payroll contributions are: 10% for old-age pension, and 2.5% to 3.5%, which pays the premium for disability and survivors to a private insurance company, and the rest goes as commission to the AFP; a voluntary additional contribution of 10% also goes to old-age. The insured contributions for the old-age pension are deposited in an individual account at the AFP, funds are invested and capital returns are added to the account. At the time of retirement (at age 60/65) the insured can chose among three pension options. Although the system is said to be private, the state regulates it and supports a heavy financial burden: covers the high deficit of the public system which was left with only 16% of the total insured but with 96% of the total pensioners; awards a recognition bond to the insured in the private system at the time of retirement, the bond is equal to the value of the contributions previously paid to the public system, indexed to inflation, and earns 4% annual interest; pays the difference to a minimum pension for those who lack sufficient funds in the AFP; and finance social assistance pensions, unemployment compensation and family allowances. The state also provides guarantees in case of AFP bankruptcy or investment yields below the required minimum. In the 1982-83 crisis the government intervened some banks and corporations associated with major AFPs to impede the collapse of the system; after the recovery the state withdrew and enacted legislation to strengthen the system. The pension reform was based on a series of assumptions, and the experience of the last 14 years shows that some of them have materialized but many others have not. The insured is supposed to have an incentive to register and punctually pay his contributions, because there is a strict relation between his payments and the size of the pension, therefore, minimizing evasion and payment delays. Coverage of the labor force declined from 62% to 57% in 1980-82, due to high unemployment during the crisis, but increased with the recovery to 86% in 1991. Mandatory registration of salaried employees in microenterprises is only 42% however, and voluntary registration of self-employed is 29%; furthermore, from 49% to 58% of all insured registered do not actively contribute. Freedom of selection and change of AFPs by the insured, was expected to foster competition among Al+, hence, minimizing their commissions and administrative costs, and maximizing the investment yield. The number of AFPs was stagnant

510

WORLD

DEVELOPMENT

(at 12) in the first decade, although the number increased to 16 in 1995. About 70% of the insured in the private system are covered by the three major AFPs, which are not necessarily those that charge the lowest commissions and earn the highest yields. The insured lacks adequate knowledge to select the best AFP, and often makes his decision influenced by salesmen (who earn a commission every time they get an affiliation or a shift) and by AFP publicity. The average commission declined until the 1990s but has increased again, and still it is unclear whether administrative costs of the private system are lower or higher than in the prereform system. The elimination of the employer’s contribution was supposed to correct the substitution of manpower by capital. There is no evidence so far to support or reject that assumption. The capitalization method should increase the national savings ratio and result in a proportional expansion of the domestic capital market. AFP funds at the end of 1995 amounted to US $25,000 million or 40% of GDP, and the annual rate investment yield averaged 13.7% in 1981-94, but the 1995 Mexican crisis turned the AFP yield negative in that year (the 198 l-95 average yield declined to 12.8%). The domestic capital market has indeed grown but not as much as initially anticipated,and there are doubts on whether such market will be able to absorb the growing capital flow. The proportion of investment in enterprise shares and bonds was 38% in mid 1995, but their value is said to be artificially inflated because there is a relatively small number of them that meets the criteria for investment. In 1991, investment in foreign instruments (as much as 10%) was authorized as an alternative but only 0.5% was invested in 1995. There is neither a consolidated balance of revenue and expenditures of the combined public and private systems, nor evidence that the reform has led to an increase in the national saving ratio. Finally, the reform has led to high financial costs for the state which have to be met either by: debt (transferring the burden to future generations), or taxes (imposing the burden on the current generation) or depleting resources from other public programs (harming low-income groups and the poor). A combination of the first and third approaches was used by the military regime (Arrau, 199 I : Iglesias and Acufia, 1991; Gillion and Bonilla, 1992; Mesa-Lago. 1994a, 1995). Health-care reform: Health care was also reformed in 1981, allowing the insured to select the public-social between insurance scheme (FONASA) or private HMOs of their choice (ISAPRES). The insured pays a payroll contribution of 7% to either FONASA or the ISAPRE (the employer does not pay); the insured in the latter have to add a copayment to finance the package of benefits offered, which must be better than in the public sector but does not offer preventive, maternity and emergency services (hence, it is indirectly subsidized by

the public scheme). In 1991, 72% of the population was covered by FONASA, 19% by ISAPRES, 5% by the armed forces and 4% was not covered; it is projected that in 1996,29% will be covered by ISAPRES. As the latter grows, the lower income groups have been left in the public scheme, increasingly deprived of the contribution of higher income groups, hence, public services have deteriorated and emergency services were in crisis at the end of 1992. The number of ISAPRES rapidly increased to 34 at the end of 1991 (more than twice the number of AFPs); the six largest 1SAPRES cover close to three-fourths of the beneficiaries. There seems to be more competition among 1SAPRES than among AFPS: the costs of administration and sales have significantly declined in the former but still are high. P olitic~ C$ rhr reform: The military-authoritarian regime established in 1973 banned or destabilized political parties, trade unions and professional associations. and controlled congress, thus weakening the pressure groups and empowering the state to reform social security. The success of the reform made impossible to the democratic governments to significantly reform it but only to improve some marginal aspects.

(e) Mi.red systems (i) Argentina Overall evaluation andproblems: In the 1960s and 197Os, the multiple independent pension funds existing in Argentina were unified and relatively standardized, mostly by military governments, and administered by the state (the armed forces were excluded and maintain their privileges). Health insurance remains extremely fragmented and operated by trade unions. By the end of the I98Os, close to 80% of the population was covered (including the self-employed) virtually against all social risks. Benefits were generous and unequal. The overall age of retirement was 55/60 for females/males, but a few privileged groups could retire with minimum years of work regardless of age. The pension was calculated as 82% of the average of the best three years of salary and had to be indexed to overall salary adjustment. Real pensions actually declined by one half in 1981-91, but successful judicial claims forced the government to retroactively pay the pensioners the difference between the pension legally set and that actually paid; in 199 1 the state settled the debt to the pensioners at US $7 billion. Social security expenditures equaled 13% of GDP in 1991 and 80% were in pensions. The payroll contribution was 56%, the highest in the region, but evasion ranged from 30% to 40%. Reserves disappeared in the 1980s and the financing method became pay-as-you go. In addition to special taxes, by the end of the 1980s the state had to subsidize 35% of pension expenditures. The ratio of contributors to pensioners was 1.62to 1 in

SOCIAL WELFARE! REFORM

1990 but was expected to be 4 to 1. Projections for 2025 showed that either the payroll contribution would have to triple or the state subsidy double to keep paying pensions. The pension actuarial deficit in 1993 was much worse than that of Chile (in 1980) but somewhat smaller than in Uruguay. Pension reform: The mixed pension system mandatorily combines a public scheme, based on payas-you-go, which provides a basic pension (thus eliminating the need for the state to guarantee a minimum pension, as in Chile), and a supplementary fully funded, which is very similar to Chile’s (see below). Those already insured had three months to decide whether to stay in the old system (reformed) or join the new mixed system; future entrants in the labor force will have the same option. Therefore, the old public system (public scheme in the mixed system) is not closed (but reformed), and the fully-funded scheme supplements rather than substitutes the public scheme in the mixed system. The employer’s payroll contribution is maintained and goes to the public scheme, and there is no reduction in the insured’s contribution which goes to the private scheme. The state contributes to the public scheme through several taxes, but its burden seems to be lower than in Chile because the deficit of the public scheme is considerably smaller. The retirement age will be increased to 60/65 and the years of contribution to 30 (10 more than in Chile). The recognition bond (“compensatory benefit”) is adjusted to inflation but does not earn interest, has a ceiling of 60% and is paid by the public scheme instead of by the state, hence, its cost should be lower than in Chile. Those who stated in the old system receive an additional benefit consisting of a percentage increase over their salaries. The fully-funded scheme has a few differences with Chile’s: AFJPs (instead of AFPs) can be operated not only by exclusive corporations but also by trade unions, banks, associations of entrepreneurs and professionals, cooperatives, and mutual-aid-societies; changes among AFJPs are limited to two annually, which reduced the salesmen’s gains but curtails the insured’s freedom of choice; collection of contributions is done by a social security agency through a unified system which reduces the bureaucratic burden on employers; AFJP publicity is regulated by the state; and the state provides even more guarantees to the insured than in Chile, e.g., if an insurance company goes bankrupt, the state is responsible for paying the pension (Schultess and Demarco, 1993; Mesa-Lago, 1994a, 1994b). At the end of 1995 2 1 AFJPs, had 3 5 million affiliates (about 55% of the total number of insured), with a cumulative fund of US $2,500 millions (close to 1% of GDP), and the investment yield in August 1994-December 1995 averaged 12.8% (Mesa-Lago, 1995). Health-care reform: President Alfonsin tried to

511

reform the health care system, but was unsuccessful because of his declining power and opposition from the trade unions. In his first term, President Menem focused on the pension reform and did not try to change the health system. In 1996, however, he confronted a powerful general strike and threatened the unions with a reform of prestaciones sociales or health cam services controlled by them. Politics of the reform: The following factors largely explain the success of the pension reform in Argentina: a powerful president (some call the system “authoritarian democracy”), leader of the Peronista party, who was able to control the trade unions and generate significant population support through an economically successful neoliberal reform, and who vigorously pushed the reform in Congress; pensioner associations considerably weaker than in Uruguay, whose members’ rights were basically guaranteed by the reform and, in addition, received a substantial sum by the debt settlement; strong technical support to the project, a long period of discussion of the legal draft, and modifications introduced to reach a consensus; and the lack of plebiscites in Argentina allowing the population to reject an enacted law. The health-care system remained unchanged in 1996 but its reform appeared to be on the horizon. (ii) Uruguay Overall situation and problems: Social security reform began in the 1960s mostly under the military regime, and led to the unification of the biggest pension funds (under the social security bank or BPS which covers 87% of the insured) and fair standardization of entitlement conditions and benefits. But the reform maintained groups with privileged conditions, inside of the BPS, and allowed even more privileges in seven independent funds, outside of the BPS (including the military and the police). Furthermore, the structural financial problems of the system were not corrected. In 1979 a law curtailed some of the liberal conditions and benefits within the BPS (e.g., ages of retirement were increased from 45/55 for females/males to 55/60) but did not change the privileged regimes for top political jobs, judges and teachers; the law also allowed liberal conditions for retirement in the transitional period, hence, in 1982, the system deficit reached 6% of GDP. In 1987, a new law tightened some of the liberal conditions of the privileged schemes within BPS and introduced other costsaving measures (which reduced the deficit), but excluded a most needed raise in the age of retirement to 65160. A constitutional amendment, supported by virtually all political parties and approved by 80% of the population in a 1989 plebiscite, mandated the adjustment of pensions to the cost of living. This measure required significant increases in taxation, despite of which both the deficit and inflation rose (the latter almost doubled in 1988-90). In spite of the minor

512

WORLD DEVELOPMENT

reforms described, entitlement conditions in BPS are still excessively generous; for instance, the average life expectancy of a female pensioner is 24 years and, under privileged regimes (e.g., teachers) the average increases to 34 years; the pension is based on the average salary of the last three years, adjusted for inflation. As a result, in 1992, the cost of the system was 14% of GDP and it was projected that, by the year 2000, the deficit of the pension program alone would be 33% of income. Government leaders concluded that the crisis was enormous and irreversible unless a reform was rapidly enacted. Pension reform: As in Argentina, the Uruguayan reform has introduced a mixed pension system; it combines a compulsory public reformed program, on pay-as-you-go, that provides a basic pension, and a supplementary, fully-funded program, with individual accounts; in addition, there is a voluntary savings program. But there are significant differences with Argentina. All those insured in the BPS (salaried and self-employed) who are less than 40 years old, as well as all future entrants in the labor force are obligatorily covered by the new system. Those who become entitled to a pension by the end of 1996 or are older than 40 stay in the old system; the second group, however, can voluntarily join the new system during a six month period after the law begins to be applied. Percentage contributions by the insured (increased by 2%) are applied on three salary brackets: until 5,000 pesos monthly to the public program, from 5,000 to 15,000 to the supplementary program, and above 15,000 pesos to the voluntary savings. The employer’s contribution was reduced by 2% and up to 15,000 pesos; all goes to the public program. The state covers any resulting deficit of the public program. Common old-age retirement is equally set at 60 for both ages (the female age will increase gradually from 55 to 60) and 35 years of work/contributions; advanced age retirement is set at 70 (the female age will gradually raise from 65) and 15 years of work; the state also pays a social assistance pension for the dispossessed at age 70. Benefits are set in constant units adjusted for inflation and a minimum and maximum are fixed for pensions. The supplementary pension program has the same entitlement conditions as the public program, but there is not a compensatory benefit as in Argentina (there is no need for a minimum pension in the private program as in Chile either, as a basic pension is paid by the public program). The supplementary program is administered by AFAPs (similar to those in Argentina and Chile). But the BPS and other three public agencies can operate AFAPs, as well as private institutions; the latter cannot start, however, until at least one public AFAP is functioning. Changes of AFAPs by the insured are limited to two annually, as in Argentina. There is not a superintendency of AFAP in Uruguay, but the Central Bank exercises most regulatory and supervisory functions, while the BPS

collects the contributions and keeps records of the labor history of the insured (Ley de Reforma Previsional, September 3,1995). The burden of Uruguay’s new system should be lower than in Argentina (and Chile) because there is no compensatory benefit (nor a recognition bond) but the age of retirement in Uruguay is set lower than in the other two countries. Health-care reform: There has not been any important reform of the health-care system at least by mid-1996. Politics of the reform: The Uruguayan militaryauthoritarian regime, as well as the first two democratic administrations, failed to thoroughly reform a system which was not only in crisis but maintained significant inequalities. Explanations given for that phenomenon were: the most aged population in the region, with the lowest ratio of one active insured per one pensioner, and about one-fourth of the total population receiving a pension; the existence of powerful pensioner associations which control the two major political parties whose leaders can lose their jobs if they pass legislation hurting the pensioners; the availability of plebiscites that can be used by the population to approve or reject legislation; and the lack of both a coherent economic school of thought among technocrats and a strong president supportive of the reform (Filgueira and Papadopulos, 1994). Preceded by a discussion in 1990-91 on alternative reform models, the government selected a mixed system and, after considerable debate to reach a consensus among the leaders of the two major political parties, a legal draft was submitted to Congress but rejected by it in May 1992. The two major parties, however, agreed prior to the 1995 elections to solve the crisis by passing the pension reforms and the law was approved in September of that year and began operations in March 1996 (Uthoff and Szalachman, 1991; Mesa-Lag0 1994a, 1995).

(f) Selective or parallel systems (i) Peru Overall situation and problems: Social security evolved in Peru in a fragmented, stratified manner, although not as much as in the pioneer countries. In 1968-80 military governments unified and standardized the system (excluding the armed forces) which became administered by an autonomous institution (IPSS). The later only covered 22% of the population at the end of the 1980s and the ministry of health was expected to cover 60% of the population (including all the poor) with one-tenth of the resources assigned to IPSS, hence less than half of that population had real access. The democratic populist government enacted laws in 198C87 to expand IPSS coverage to the informal sector and peasants (but without providing additional resources), and integrate all health care services

SOCIAL WELFARE

into a national system; none of the two projects materialized because of the economic crisis and a weakened president. In the second half of the 1980s the state debt escalated but in real terms virtually vanished, evasion and payment delays rose to 40%, there was a growing deficit, real pensions declined by twothirds and the quality of health services deteriorated, but administrative costs increased to 52% of total IPSS expenditures (the highest among the eight countries). By 1990 there was a national consensus that social security had to be reformed but no agreement on the way to accomplish it. Pension reform: In 1991 president Fujimori enacted a decree law that allowed the introduction of a private pension scheme, but with some important differences: the IPSS would continue (because the Constitution impeded its termination) and the insured would be able to select between the IPSS and the private scheme. The president’s coup and suspension of the Constitution was followed by a new decree law, in mid-1992, which permitted the closing of the IPSS.

REFORM

513

But the final law, approved at the end of 1992, returned to the parallel or selective model and the new system began to function in May 1993. Under the new pension system those already insured can stay in the IPSS or move to an AFP of their choice (29% of the insured had moved by 1995), and new entrants to the labor force can choose between the two systems. The IPSS retains the old conditions and contributions, but pensions have been frozen since 1992 despite inflation. The retirement age in the private scheme has been increased to 65 years for females and males (compared with 55/60 in the IPSS, but ages were equalized in 1995) and 20 years of contributions are now required (five to seven years more than in the IPSS). The employer’s contribution has been eliminated in the private scheme (but remained at 6% at the IPSS until 1995 when they were standardized), and the insured’s contribution in the private scheme has been raised from 3% (in the IPSS) to 13.5%, plus 1% to finance social assistance to disabled and old people (a total of 14.5%). Until 1995, employers had an

Table 5. Degree ofprivatization of social security in case studies: 1995-96 Pensions

Countries I. Chile 2. Argentina 3. Peru 4. Colombia 5 Uruguay 6. Mexico 7. Cost Rica

8. Cuba

Type of Reform PrivateSubstitutive* Mixed* Parallel or Selectives Parallel or SelectiveS: Mixed$ Public and Complementaryll Public

Health Care

% PEA in Private

Rank

94

Very High

55 29

High-Medium Medium-High

20

Medium

Began March 96 40**

None

Type of Reform SelectiveDual? None None

% of Pop. in Private

Rank

Composite Rank

28

High

Very High

Low LOW

Medium Medium-Low

2

Medium

Medium

Medium-Low

SelectiveMultipleg None

Low

Medium-Low

Low-Medium

None

Low

Low to Medium

Very Low

Public, collaboration with private None

Low

Very Low

Very Low

Very Low

Very Low

None

Sources: Based on Table 4 and Mesa-Lag0 (1995). *Private corporation exclusively devoted to pension administration. tThere is a choice between public and private programs. fThere is a choice between a public-reformed program and a mixed program with two obligatory components: Public, basic benefits, pay-as-you-go; and supplementary, fully-funded-individual. The latter is administered by institutions of various types (private, public, mutual-aid, banks) but the public role is greater in Uruguay than in Argentina. §There is a choice between a public program (thoroughly reformed in Colombia and little reformed in Peru) based on scaledpremium, and a fully-funded-individual program. The latter is administered by private corporations in Peru, and by multiple types of institutions in Colombia. jJPublic, social insurance and private institutions to organize administrators and producers of services, with an autonomous nature; system will not be fully operational until 2000. lIThe supplementary program is obligatory and is partly operated by banks but the state controls the funds. A law approved at the end of 1995 should move the system further to the private sector but regulations must be approved in 1996 and the system will not be operational until 1997. **In both public and supplementary programs.

514

WORLD DEVELOPMENT

advantage to shift their employees to the private system as they did not have to pay contributions. The increase in insured contributions (11.5%) is initially compensated with a similar increment in their salaries. The recognition bond is expected to be paid by the IPSS (instead of the state); it is adjusted to inflation, but its not protected against currency devaluations, does not earn interest, and requires a minimum of four years of previous contributions. (In practice the IPSS is not paying the bond, due to poor records and lack of funds; the AFPs are being forced to pay such bonds to their insured and, therefore, the AFPs are demanding an increase in contributions). Until 1995 the state did not recognize the right of a minimum pension for those who chose to join the private scheme; such right was established but has not become effective. At the end of 1995 there were six AFPs in operation (down from eight), which covered about 29% of the total insured; accumulated funds reached US $583 million (0.5% of GDP), and the real investment yield in 1993-95 averaged 7.7%. Health-care reform: The reform of the health system, approved in 1991, also followed the parallel or selective model: the insured can choose between IPSS and OSS similar to ISAPRES; but in mid 1995 the needed regulations had not been enacted and the law was automatically annulled. The government is currently studying a new reform in the sector. Politics ofthe reform: Fujimori’s failure to implement the Chilean model in Peru, in spite of his power, might be explained by the following factors: the constitutional impediment to eliminate the public scheme and strong opposition to take that action; the high cost of full privatization to the state, as the IPSS was in a financial chaos in 1990; and the serious difficulties to extend coverage under a private scheme because of much higher poverty incidence and informal sector in Peru than in Chile (Mesa-Lago, 1989, 1992, 1994a, 1994b, 1995; Aparicio et al., 1994; “La reforma .” 1994). (ii) Colombia Overall situation and problems: In 1990 Colombia’s social security system was the most fragmented in the region (with more than 1,000 institutions) but population coverage was 21%, slightly below Peru; 70% of the insured were in the social insurance institute for private workers (ISS), 5% in the institute for civil servants (CAJANAL), and 25% in hundreds of institutions. The public national health system was expected to cover 67% of the population (with one half of the ISS revenue) but only 39% had real access, the lowest income groups and the poor were not protected. There were significant inequalities among the insured groups; for instance, retirement ages at ISS were 55/60 but in CAJANAL were 45/50, and other funds only required IO-20 years of work regardless of age. The state subsidized 67% of

CAJANAL expenditures but did not contribute to the ISS. Administrative costs reached 42% of total expenditures in 1986, the second highest among the eight countries. The actuarial deficit of ISS was estimated in 1988 at US $2 billion and that of CAJANAL at US $1 billion. Pension reform: The Constitution of 1991 established that social security ought to be provided and expanded by the state, with private participation. In 1992, president Gaviria submitted to Congress a legal draft following the Chilean model, but strong criticism forced him to withdraw and resubmit it in mid1993, with only minor modifications. Ultimately, there was a compromise and the Congress approved a selective system at the end of 1993. The insured at ISS or the civil-servant funds whose age is 35/40 or more can maintain the entitlement conditions of the old system; the new system is applied to insured below that age and to new entrants in the labor force. CAJANAL is closed and its insured covered by a state Public Fund; newly appointed civil servants are automatically affiliated with the new system. Those in the new system can choose between the public (ISS) or private schemes, and change twice a year. Payroll contributions for pensions in both schemes are the same and will gradually increase for both employers and insured; if the latter earns more than four minimum salaries he must contribute an additional 1% to a Solidarity Fund ear marked to extend coverage to low income groups. The total contribution in 1994 was 12.5% and increased to 14.5% in 1996 (higher than in Chile). Entitlement conditions in the ISS have been tightened, thus, the retirement age will increase to 57/62 plus 20 years of contribution. Retirement in the private scheme only requires a specific amount saved in the individual account, regardless of age and years of work. The state guarantees a minimum pension only when the insured is age 57162, has 23 years of contribution and sufficient funds to finance such pension. The recognition bond paid by the state will be indexed to adjusted salaries, earn an interest of 3 or 4%, and be capped by a ceiling. Limitations to the minimum pension and the recognition bond should reduce costs in Colombia compared with Chile. SAFPs can be organized not only by ad hoc corporations but also by cooperatives, trade unions, mutual-aid societies, family-allowance funds, unemployment funds, and even public financial institutions. In mid- 1995, there were 8 SAFPs which covered about 20% of the total number of insured and had accumulated US $150 million (0.2% of GDP), with an average real yield of -3%. Health-care reform: The health care reform allows the insured to continue in the ISS or move to an HMO (EPS); the latter must offer a basic plan to cover the insured and his dependents. Both the employer’s and the insured’s contributions have been increased.

SOCIAL WELFARE REFORM

Politics of reform: The attempt to introduce the Chilean model of full privatization failed in Colombia mainly because this country, being a democracy, allowed strong criticism of the legal draft and forced a compromise in Congress. In addition, Colombia’s population coverage is the lowest among the eight cases, and a fully privatized system would have blocked the needed expansion of coverage (this was one of the criticisms against the president’s two proposals, and the reason for the creation of the Solidarity Fund). Trade unions opposed the abolition of the employers’ contribution, and important sectors within the government were also concerned that such elimination would significantly increase the state financial burden (FESCOL, 1992; Mesa-Lago, 1994a, 1994b, 1995). The degree of privatization of social security (pensions and health care) is roughly measured in Table 5, and a composite ranking of the eight countries shown.

4. VIABLE TYPES OF REFORM We assume that, in the rest of the 1990s political and economic liberalization trends will continue in Latin America; within that framework, what type of social security reforms would be probable and viable? The previous section showed that the most radical structural reforms of social security have been done by authoritarian regimes. A partial process of unification and standardization of fragmented stratified systems was accomplished by military regimes in Argentina, Uruguay and Peru in the 1960s and 1970s but all of them excluded the armed forces and some left untouched privileged schemes or special entitlement conditions for other powerful groups, such as top executive posts, congressmen and the judiciary. The most repressive and neoliberal military regime, that of Chile under Pinochet, succeeded in unifying, standardizing and eliminating privileges in the old pension system (exempting the military reformers), and introduced a substitutive private pension scheme and a selective health-care scheme. These actions were made possible by the previous disbanding of Congress, banning of political parties and unions, and control of the news media, thus impeding any opposition to the reform. In Argentina neither the military nor President Alfonsin’s populist regime were able to implement structural social security reforms. President Menem succeeded in eliminating privileges and reforming the pension system, based on his leadership of the Peronist party, success in structural adjustment and economic recovery, and extraordinary powers granted to him. Yet the new Argentinian system is mixed and congressional approval was gained at the price of significant compromises in the bill and concessions to interest groups. Furthermore, Menem did not try in his

515

first term to reform the health-care system, largely controlled by trade unions but, after a confrontation with the latter in 1996, threatened them with the health reform. In Uruguay, both the military and the first two democratic governments failed to reform the pension system, due to lack of a powerful president, the strength of pensioners associations, the very high proportion of pensioners in the population, and the availability of plebiscites to amend or repeal legislation. But, prior to the 1995 election, an agreement was reached among the two major parties to pass a mixed system (although with a greater role of the public sector than in Argentina) which was finally approved in September of that year. The extraordinary concentration of state power by the Cuban revolution permitted another radical reform (statization, unification and standardization) of both pensions and health care, through previous elimination of political parties and domestication of trade unions; but the armed forces retained their privileged system. In the previous four countries, social security virtually has universal coverage against all social risks, but it was not able to compensate the social costs of economic reform, except in Uruguay and Cuba, and with very high costs. The future viability of these two systems is in question, particularly in Cuba, because of the severity of its current crisis. The presidents of Colombia and Peru failed to introduce a substitutive private pension & la Chile and accepted parallel or selective systems. Such an outcome was even more remarkable in Fujimori’s case, because of his dictatorial powers, and could be explained by constitutional limitations and the fear of huge fiscal costs from such type of reform. Being in a democracy, President Gaviria confronted a more formidable opposition and ultimately had to compromise,even more than Fujimori. In these two countries, social security only covers one-fifth of the population and the reform may become a serious obstacle for extension of coverage (Colombia’s Solidarity Fund appears underfunded to accomplish that task). The reformed systems in both countries lack mechanisms to help vulnerable groups affected by economic reform. Costa Rica’s social security not only has universal coverage, but its social assistance scheme and coordination with the ministry of health, enabled the system to perform a compensatory function throughout economic reform and the crisis. These achievements took place under the predominant social-democrat party (PLN) which has ruled most of the time since the early 1950s. Yet the financial burden of the system is quite high (although less than in Argentina, Cuba and Uruguay) and partial reforms were introduced, pressured by the crisis, under PLN administrations, to strengthen it, including collaboration with the private sector. The neoliberal administration (1990-94) designed a comprehensive health-care reform but

516

WORLD DEVELOPMENT

failed both to implement it and further privatize the system. The PLN returned to power in 1994 and soon faced economic stagnation and growing inflation and fiscal deficit. In a surprising pact with the opposition and business groups, president Figueres began to implement the health-care reform (although maintaining its predominant public nature) and is studying further pension reforms. The Mexican system is neither universal nor able to play a significant compensatory function vis-ci-vis social costs of economic reform; the rural solidarity health-care scheme could have performed the latter but was adversely affected by the crisis. The reforms introduced in the early 1990s aimed to restore the equilibrium of the system, incorporate minor compensatory functions and develop a supplementary pension scheme, but they failed to correct the fundamental financial flaws of the system which were aggravated by the 1995 crisis. Confronting the latter, President Zedillo reached an agreement with unions and business groups and, at the end of 1995, passed the general lines of a structural reform of the system; but its regulations must be approved by congress in 1996 and until then we will not know what the specifics are (the system will not begin to be introduced until 1997). The replication of the Chilean model in Latin America is not only obstructed by political liberalization but also by divergent socio-economic and social security conditions. In 1980 Chile was in the fourth year of an economic boom that provided a comfortable base for the reform, but the grave recession of 1982-83 forced government intervention to prevent a failure of the AFPs. Most Latin American countries are emerging from the long crisis but economic growth tends to be sluggish and they have not been able to recover the pre-crisis social levels. Capital

markets in the large majority of countries are either nonexistent or considerably less developed than that of Chile in 1980 and, therefore, less able to absorb a sudden capital flow. In less-developed countries (e.g ., Bolivia, Ecuador, Paraguay and most of Central America and the Latin Caribbean), less than onefourth of the population is covered by social security; furthermore, poverty incidence, the informal sector, self-employment and the marginal rural sector are much more extended than was the case in Chile. If public schemes have been unable to significantly expand population coverage with a Bismarckian model, a private scheme will certainly be an unsurmountable barrier, as the majority of the population (nonformal, nonsalaried, rural) will not have access to the private scheme. Scarce public funds will be committed to consolidate the social security system of a minority of the population at the expense of desperately needed resources for the majority, such as public assistance, primary health care and so forth. Pioneer countries such as Uruguay confront a pension disequilibrium much worse than Chile faced in 1980; the cost of the reform, therefore, would be higher. Demographic factors are also more adverse, thus the ratio of contributors to pensioners was two to one in Chile but is one to one in Uruguay. If the democratization trend continues in Latin America, mixed or selective models of reform will be more viable politically, economically and socially than substitutive private models. Furthermore, there are still a few systems in the region that may be salvable with adequate reforms. But the goals of universal coverage and infusion of compensatory functions will remain the greatest challenge to social security in the future.

REFERENCES Aparicio Valdez, Luis et al., “Peni: Informe sobre el sistema privado de pensiones,” Andlisis Laboral, No. 199 (January 1994),pp. 18-33. Arrau, Patricia, “La reforma previsional chilena y su financiamiento durante la transicibn,” Coleccidn Esrudios CIEPLAN, No. 32 (June 1991), pp. 544. Congreso de1 Trabajo y Consejo Coordinador Empresarial, “Propuesta obrero empresarial de alianza para el fortalecimiento y modemizaci6n de la seguridad social,” Mimeo (Ciudad MCxico: 1995). Economic Commission for Latin America and the Caribbean (ECLAC), El Per@ de la Pobreza en Am&ica Latina a Comienzos de 10s Afros 90 (Santiago, Chile: ECLAC, Tercera Conferencia Regional sobre Pobreza en AmCrica Latina y el Caribe, November 3,1992a). Economic Commission for Latin America and the Caribbean (ECLAC), Equidad y Transformacidn Productiva: Un Enfoque Infegrado (Santiago, Chile: ECLAC, April, 1992b).

Economic Commission for Latin America and the Caribbean (ECLAC), Panorama Social de Amkca Latina (Santiago, Chile: ECLAC, 1993a). Economic Commission for Latin America and the Caribbean (ECLAC), Preliminary Overview of the Economy of Latin America and the Caribbean 1993 and 1994 (Santiago, Chile: ECLAC, December 17, 1993b and December 20,1994). FESCOL, La Reforma de1 Regimen Pensional en Colombia (Bogota, Colombia: FESCOL, 1992). Filgueira, Fernando and Jorge Papad6pulos, “La reforma de1 sistema de seguridad social en Uruguay: Voluntad politica y bloqueos decisionales,” Paper presented at the Latin American Studies Association XVIII International Congress (Atlanta,GA: LASA,March 10-12.1994). Gillion, Colin and Alejandro Bonilla, “Analysis of a national pension scheme: The case of Chile,” International LobourReview,Vol. 131,No.2(1992),pp.171-195. Giiendel, G., Ludwig and Juan Diego Trejos, Reformas

SOCIAL WELFARE Recientes en el Sector Salud en Costa Rica (Santiago, Chile: ECLAC, 1994). Iglesias, August0 and Rodrigo Acufla, Chile Experiencia con un Regimen de Capitalizacidn 1981-1991 (Santiago, Chile: CEPAL-PNUD, 1991). Interamerican Development Bank (IDB), Economic and Social Progress in Latin America 1990 (Washington, DC: Johns Hopkins, 1990). “La reforma de1 sector salud en America Latina,” Andlisis Laboral, Vol. 18, No. 201 (March 1994), pp. vi-xxii. “Ley de1 seguro social,” Diario Official (Mexico D.F.) (December 21,1995), pp. 2563. Mesa-Lago, Carmelo, “Alternative strategies to the social security crisis: Socialist, market and mixed approaches,” in Carmelo Mesa-Lag0 (Ed.), The Crisis of Social Security and Health Care: Latin American Experiences and Lessons, Latin American Monographs and Document Series, No. 9 (Pittsburgh: Center for Latin American Studies, 1985),pp.311-361. Mesa-Lago, Cannelo, Ascent to Bankruptcy: Financing Social Security in Latin America (Pittsburgh, PA: University of Pittsburgh Press, 1989). Mesa-Lago, Carmelo, Health Care for the Poor in Latin America and the Caribbean (Washington, DC: PAHO, 1992). Mesa-Lago, Carmelo, (Ed.), Cuba After the Cold War (Pittsburgh, PA: University of Pittsburgh Press, 1993a). Mesa-Lago, Carmelo, “The social safety net in the two Cuban transitions,” in Transition in Cuba: New Challanges for US Policy (Miami, FL: Florida International University, Cuban Research Institute, 1993b),pp. 601-670.

REFORM

517

Mesa-Lago, Carmelo, Changing Social Security in Latin America: Towards the Alleviation of Social Costs of EconomicReform (Boulder,CO: Lynne Rienner, 1994a). Mesa-Lago, Carmelo, La Reforma de la Seguridad Social y las Pensiones en America Latina: Importancia y Evaluacidn de las Alternativas de Privatizacidn, Second edition (Quito, Ecuador: INCAE, 1994b). Mesa-Lago, Carmelo, Are Economic Reforms Propelling Cuba to the Market? (Coral Gables, FL: University of Miami, North-South Center, 1994~). Mesa-Lago, Carmelo, “The reform of social security pensions in Latin America: Public, private, mixed and parallel systems” (Pittsburgh, PA: University of Pittsburgh, 1995). Schulthess, Walter and Gustav0 Demarco, Argentina: Evolucidn de1 Sistema de Prevision Social y Propuesta de Reforma (Santiago, Chile: CEPAL, 1993). Soto Perez, Carlos J., “Bases biometricas dinamicas y valuaci6n actuarial,” Cuestidn Social, No. 26 (JulySeptember 1992),pp. 3445. Uthoff, Andras and Raquel Szalachnan, Sistema de Pensiones en America Latina: Diagn6stico y Alterna tivas de Reforma (Santiago, Chile: CEPAL/f’NUD, 1991). Whitehead, Laurence, “Economic liberalization and democratization: Explorations of the linkages,” World Development, Vol. 21, No. 8 (August 1993). pp. 1245-1393. World Bank, World Development Report (New York: Oxford University Press, various years).