19682
1999
Report on the Meeting of the   WORLD
Latin American and                          BANK
Caribbean Forum                             INSTITUTE
on Poverty, Inequality, and
Vulnerability                               WBI \XWorking Papers
Buenos Aires, October 19-20, 1998
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REPORT ON THE MEETING OF THE
LATIN AMERICAN AND CARJBBEAN FORUM
ON POVERTY, INEQUALITY, AND
VULNERABILITY
BUENOS AIRES, OCTOBER 19-20, 1998
The World Bank Institute
Washington, D.C.



Copyright C 1999
The International Bank for Reconstruction
and Development/The World Bank
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
The World Bank enjoys copyright under protocol 2 of the Universal Copyright Con-
vention. This material may nonetheless be copied for research, educational, or schol-
arly purposes only in the member countries of The World Bank. Material in this series
is subject to revision. The findings, interpretations, and conclusions expressed in
this document are entirely those of the author(s) and should not be attributed in any
manner to The World Bank, to its affiliated organizations, or the members of its Board
of Directors or the countries they represent. If this is reproduced or translated, The
World Bank would appreciate a copy.



Contents
Summary  .............................................   I
Knowledge as a Development Tool. The Knowledge Bank ........... 12
Vinod Thomas
The New Context of Poverty Reduction in Latin America
and the Caribbean ...........................................  5
Robert Ayres
After Neoliberalism: A New Path ..................... 19
Jorge Castafieda
Poverty, Exclusion, and Access to Services: The Role
of Institutional Reforms ...............     ........................... 32
Ariel Fiszbein
Latin American Labor Markets in the 1990s ................................... 45
Barbara Stallings






Summary
The World Bank's Latin America and the Caribbean Region (LAC), the World Bank
Institute (formerly the Economic Development Institute [EDIJ), and the team work-
ing on the Bank's World Development Report on Poverty and Development (WDR2000/
1) organized a "Forum on Poverty, Inequality and Vulnerability" in Buenos Aires,
Argentine, on October 19-20,1998. Its objective was to discuss the issues mentioned
in the forum title, as well as the policies, programs, and projects required to reduce
their magnitude in Latin America and the Caribbean. This event sought to contrib-
ute to the WDR2000/1, but also to generate a multisectoral discussion on poverty in
the region.
The following summary of forum discussions also delineates the elements iden-
tified as priorities in a research agenda that should continue to refine the debate on
the dimensions of poverty, inequality, and vulnerability, as well as the policies to
fight them.
Note: At the time of writing, the current World Bank Institute (WBI) was the Eco-
nomic Development Institute (EDI) of the World Bank. Most references to the EDI
in this document have been left unchanged.
Introduction
Those participating in the introduction session were Vinod Thomas (director of the
World Bank's Economic Development Institute), Robert Ayres (principal social sci-
entist, Poverty Unit, Latin America and the Caribbean Regional Office of the World
Bank) and Katherine Bain, (specialist in Civil Society for the Latin America and the
Caribbean Regional Office of the World Bank).
Thomas highlighted the changes taking place in the World Bank as it directs its
attention not just to financing infrastructure construction projects or structural ad-
justment programs, but also to generating and disseminating knowledge. In this
context, governments and other entities at the local, national, and international lev-
els should capitalize on developing countries' experiences and knowledge for the
benefit of all concerned. This information should freely circulate among these lev-
els, breaking down the existing communication barriers.
Quoting James Wolfensohn, president of the World Bank, Thomas said that one
objective of these knowledge-dissemination efforts is to contribute to the collective
construction of a new development framework in which governments and private
sector for-profit and not-for-profit entities jointly discuss a long-term vision for
development priorities. This would form the basis on which donor actions would
subsequently be enunciated. To promote development, partnerships involving
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
actors from all the sectors-public and private, national and international-
must be created. These processes are already underway in different countries
in the region.
The process of preparing the report itself is proof of the changes taking place.
Multiple consultation processes are being developed, and some of these have al-
ready been initiated. The WDR2000/1 project also includes a research program in
which academics from developing countries will actively participate. This report
seeks to act as the catalyst to generate new research. In this regard, the World Bank,
together with the IDB and the Latin American and Caribbean Economic Associa-
tion (LACEA), will promote a network of Latin American researchers on poverty
and inequality Thomas concluded, emphasizing the importance of this particular
event for the Bank and for the region.
Ayres presented a report on the recent evolution of discussions about regional
poverty as they responded to the diagnosis and recommendations contained in the
1990 World Development Report on Poverty (WDR1990). That report had suggested
three core strategies to reduce poverty: (a) labor-intensive economic growth, (b)
access to basic services, especially education and health, and (c) social safety nets
for the vulnerable sectors.
He pointed to the need to review the validity of these priorities, given the present
situation. The WDR1 990 could be criticized for emphasizing an economic approach,
for giving little attention to inequality and social capital, and for not including the
political dimension of change necessary to reduce poverty.
In addition, important changes have occurred during the last 10 years in the
determinants and context of discussions on poverty reduction. On the one hand,
trends such as globalization, liberalization of domestic markets, democratization,
privatization, reform of the state, and political and fiscal decentralization have trans-
formed the framework in which poverty issues must be faced, demanding an evalu-
ation of the impact of these trends on the poor.
On the other, during the same period scholars' and social actors' perceptions of
the following changed radically: (1) the rediscovery of inequality as a central issue
for the region, (2) the role of social development in poverty reduction and the im-
portance of understanding how social capital is generated among the poor, and (3)
the political economy of poverty reduction. Despite our progress in advancing knowl-
edge in these critical areas, the gaps are still very striking.
Bain discussed the creation of the forum as part of the WDR2000/1 initiative
and of the Bank's changing relationship with non-govemmental sectors. The Bank
has initiated participatory processes through projects, analytical programs, and
consultations such as this forum, recognizing that other actors have valuable in-
puts and contributions to make to the issue of poverty reduction. Similarly, she
presented the mechanics of the forum and its main objective a broad, candid dis-
cussion by all present participants on what happened in the last decade with re-
spect to poverty in the region; on the policies designed to reduce poverty, including
their successes and failures; and on the challenges ahead.
Finally, Bain highlighted the forum's importance as the beginning of a process
of continuous dialogue about poverty and about actions to be taken to reduce it in
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Summary
the next millenium. She asked participants to reflect on the future of this forum and
to identify, during the meeting's final session, the networks, issues, actors, and ini-
tiatives that should be included in future forums.
Session I: Development for All: Toward a More Equitable
and Inclusive Pattem of Development
In his presentation, Jorge Castan'eda, professor at the National Autonomous Univer-
sity of Mexico and New York University, emphasized that inequality is the central
factor of the poverty problem in Latin America. Within that framework, he high-
lighted its historical and persistent nature. In the face of this "foundation clash" he
upheld the need to persevere with policies to fight inequality and discrimination.
According to Castafieda, the paradox of inequality is that interventions to re-
duce it, when confronted with a deeply rooted status quo, may lead to a worsening
of the inequalities. Such is the case in Chiapas, where the resources invested to fight
inequality in the region were captured by an historically unequal structure of elites.
The same may happen with the decentralization processes, dominated by rent-seek-
ing elites. The difficulty in fighting inequality is reflected in the fact that the two
countries that have made real and perceptible advances in reducing inequality are
Puerto Rico and Cuba. In both cases, he stated, this has been the result of massive
financial investments and transfers (from the United States of America and from
the former Union of Soviet Socialist Republics, respectively).
In concluding, he highlighted the importance of the "social citizenship" con-
cept as a tool to build modem democracies and proposed separating social rights
from employment.
The debate that followed, facilitated by Adolfo Figueroa, professor of the
Pontificia Universidad Cat6lica of Peru, highlighted a variety of important factors
related to the understanding and study of, and the fight against, inequality. The
following issues were frequently mentioned:
* The majority of the participants identified the amplitude of inequality as a cen-
tral factor in the discussion of the social development model, and affirmed that
its reduction should be a priority. For some, reducing inequality is an impera-
tive per se, while for others, its reduction is an effective way of diminishing
poverty. However, despite the close relation between poverty and inequality,
they must be seen as separate issues. Inequality would be more closely related
to the social structure, though not irreversible. Poverty would be more flexible
to policies and growth and, therefore, more easily reduced. Similarly, their im-
pacts and implications also differ.
* The measuring tools of inequality and poverty must continue to be refined,
particularly household surveys, because of the potential problems of under-
declaration of income (especially in the higher strata), which leads to an under-
estimation of inequality. The need to strengthen research on income distribution
was emphasized, paying increased attention to both low- and high-income strata.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
* Lack of quality education was clearly the essential factor explaining inequality,
while access to quality education was viewed as an effective way to reduce in-
equality. Improving poor people's access to quality education that provides the
knowledge and the necessary skills to find productive employment is essential.
However, some participants voiced concern about the risk of turning to simplis-
tic answers, such as thinking that education alone is enough to reduce inequality.
*  Inequality may be reduced, but it requires time, perseverance, and resoluteness
in social policies. In this sense, social policy should receive as much importance
as economic policy This is particularly valid in the region since-in contrast to
other regions-Latin America has sufficient means to reduce poverty and in-
equality through a system of income transfers and asset redistributions. In this
respect, issues such as agrarian reform or the minimum guaranteed income sys-
tem were discussed from opposing perspectives.
*  Policy design acquires increasing importance. It must be more participatory,
encompassing, and respectful of the visions and priorities of the groups tar-
geted for assistance, as well as of their cultural values-especially in the case of
indigenous populations.
*  However, inequality reduction requires more than a simple increase in service
provision to the poorest sectors. It demands greater social cohesion, resulting
from a change in social relations. Social capital, trust, and solidarity must be
strengthened, as they are the foundation of social cohesion.
Finally, the following subjects were identified for research:
*  Relations between inequality, poverty, and culture and institutions. Societies
are the product of complex social processes that determine the relations among
the groups and the ethical values of the whole. Thus, the understanding of these
processes must be strengthened. In this field, the comparative economic history
is fundamental, particularly with developed countries.
Given education's impact on inequality, it should occupy a significant place.
In particular, its impact on income should be studied in more depth. Is this a
simple and lineal relation or does it follow thresholds? Similarly, research ef-
forts should focus on identifying concrete ways to ensure equal access to high-
quality education at all levels.
*  Theoretical and empirical content of social citizenship.
* Study of the liberal reforms and their impact on poverty.
* Impact of external shocks and of globalization on the social welfare and redis-
tributive policies.
Session II: Delivery of Basic Services: Institutional Changes
and New Challenges
Ariel Fiszbein, EDI's Economnic Growth and Poverty Reduction coordinator, focused
his presentation on the different policy options available to improve poor people's
- 4 -



Summary
access to basic services. He highlighted experience gained in the region while ap-
plying four options: (a) decentralization, (b) privatization, (c) participation and (d)
public-private partnerships. Fiszbein proposed an analytic framework of three fac-
tors: (a) Who controls decision-making in each of the stages, (b) what tools and
authorities they have available, and (c) what incentive system they face to promote
access to quality services for the socially excluded sectors.
In most cases, implementing decentralization has avoided worsening the inter-
regional differences thanks to transparent mechanisms in the transfer of resources
that include measures of regional fiscal capacity. To avoid the risk that benefits are
captured by local elites, decentralization's political design must be considered,
emphasizing the importance of democratic and independent elections, as well as
mechanisms for local citizen participation.
For privatization to have positive impacts on the poor's access to quality ser-
vices requires a regulatory policy that includes, as one of its priorities, the obliga-
tion to expand coverage or provide universal services, as well as transparent
information mechanisms. Various schemes, such as the "education vouchers" sys-
tem in Chile, have produced interesting results, once they have included compen-
sation and information mechanisms to make effective the parents' notional capacity
to choose.
Establishing more participatory policies is one of the clear trends in which the
region has made progress. These range from simple consultations on priorities up
to management schemes giving users full responsibility. However, in order to be
successful, this "demand-driven" approach must be consistent throughout the
project's stages, so that what has been achieved in one phase is not lost in the next.
Similarly, participation demands high levels of information. Ultimately, project suc-
cess requires contributions from the beneficiaries.
Partnerships are a mechanism for transcending the traditional state-non-gov-
ernmental division regarding management schemes, in which the sum is superior
to the parts in terms of productivity and the generation of positive externalities
such as social capital. In order to exist, partnerships require decentralization,
privatization and participation schemes, as well as efforts and investments to gen-
erate trust.
In concluding, Fiszbein highlighted the importance in all cases of the adopted
institutional design, since it creates the conditions to effectively improve the poor's
access to quality services.
The plenary session, facilitated by Manuel Chiriboga, executive secretary of
the Latin American Association of Development Organizations (ALOP), acknowl-
edged the difficulties in finding replicable institutional models, since they depend
to a great extent on the general political and economic conditions of each society,
as well as its degree of institutionalization. In all cases, projects must be thought
out in such a way that they maximize their impact on the social capital, and must
be designed with poverty reduction as an integral and critical objective. The need
to differentiate between the types of services-particularly between the social and
the productive services-and to create programs for each of them was empha-
sized.
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Report on the Meeting of the Latn American and Caribbean Forum on Poverty, Inequality, and Vulnerability
Participation was identified as the core element of any initiative geared toward
improving poor people's access to basic, quality services. Such participation re-
quires training and strengthening grassroots organizations. However, participation
should not be made into a fad, or presented as an objective in itself that replaces
objectives such as the redistribution of wealth and the generation of assets and
services for the poor.
Due to the profusion and diversity of the experiences gained in Latin America,
the importance of having evaluations that allow learning from specific experiences
and making available such information to researchers, nongovernmental organiza-
tions (NGOs), and public officials was emphasized.
The need for research in the following areas was identified:
*  Costs and sources of funds to finance these institutional reforms.
*  Decentralization and privatization. It is necessary to have a better understand-
ing of the role of the intermediate organizations, in terms of both their design
and their implementation.
* Impact of institutional reforms on the relations between political and social ac-
tors, beyond their impact on the services.
Session 11l: Employment and Poverty in the Global
Economy: A Latin American Perspective
Barbara Stallings, director of the Economic Development Division of CEPAL, fo-
cused on two points: (1) the importance of understanding how labor markets func-
tion and (2) the labor market crisis in the 1990s. She recalled how structural
adjustments that give priority to the important macroeconomic balances and to the
reduction of inflation have tended to rely, to a great extent, on reduction of public
expenditure and appreciation of the real exchange rate. Similarly, she highlighted
the importance and breadth of the reforms initiated (deregulation, privatization,
and regional and world commercial and financial integration), particularly those
related to labor market flexibility. Concerning the latter, Stallings pointed to the
ongoing debate on its magnitude: for some, deregulation has been too superficial,
while for others, it has gone too far.
She highlighted certain common regional trends, with respect to labor market
evolution in this decade. Among them is the growth in open urban unemployment,
probably linked both to decreased public-sector and privatized enterprises' em-
ployment (layoffs) and to inadequate job creation due, in turn, to a limited and
capital-intensive economic growth. As a result, the earning gaps between skilled
and non-skilled workers increased. On the other hand, she emphasized the fact
that 80 percent of newly created jobs are created in the informal sector (micro-enter-
prises and/or precarious jobs without benefits). However, real salaries have im-
proved as a result of increased productivity. Finally, an element worth noting was
that urban earnings grew more than rural earnings, reversing the trend of the 1980s.
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Summary
Stallings indicated that, in the face of this situation, a certain consensus exists
regarding policies: (1) to try to maintain and/or increase the rate of economic
growth, (2) to improve access to and quality of education at the intermediate level,
as well as training for current and unemployed workers, (3) to give greater atten-
tion to small and medium-sized enterprises (SMEs), and (4) to find ways of inte-
grating the informal sector in order to improve the working conditions of its
workers.
The discussion, facilitated by Guillermo Perry, the Bank's chief economist for
Latin America and the Caribbean, was in depth and dynamic. Different visions
and options were discussed. The majority of the participants identified employ-
ment as one of the principal poverty-fighting mechanisms. Education and trairing
were also mentioned as the most efficient paths to stable employment. Other is-
sues gave rise to controversies, and disagreement persisted over the convenience,
utility, and modalities of unemployment insurance and other forms of social pro-
tection (including minimum guaranteed income) and the role of the unions in the
labor market.
Participants believe the following list of issues require greater understanding
and research:
* the informal sector role, content, and functioning mechanisms after the reforms
* ways of supporting and strengthening SMEs, particularly by large enterprises
* measurement: differences in concepts on employment, unemployment, and
formal-informal sectors
* operation of the labor market in rural areas
mobility between and within sectors
social protection mechanisms, including the concept of minimum income
* means to improve competitiveness without affecting workers negatively
Presentation of Shahid Javed Burki, Vice President of the
World Bank for Latin America and the Caribbean
Burki's presentation touched on the subjects and priorities discussed by the forum
during previous sessions. He stated that inequality is at the core of the debate and
therefore must be a priority objective of all antipoverty efforts in the region. For
such efforts to be successful, the poor must also participate actively in their design,
application and evaluation. Labor markets that provide employment access to the
poorer sectors are a crucial instrument to improve the quality of life of the most
disadvantaged.
Globalization has produced tensions with which we still do not know how to
deal. Capital now flows in and out of emerging markets almost instantaneously.
When capital is invested in the productive sector, it creates employment and wealth.
However, its withdrawal, often without being directly related to a country's eco-
nomic fundamentals, generates serious tensions that disproportionally affect the poor.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
Evidence exists for two types of poor. On the one hand are those who, due to
their circumstances, require sustained social interventions to improve their life con-
ditions. On the other are those who can overcome poverty more rapidly, thanks to a
stable and sufficient economic growth of, for example, 2 to 3 times the population
growth for a period of 5 to 10 years. But we also recognize that this second group
remains vulnerable and may be affected again by poverty if the general economic
situation changes significantly. The current crisis in the Asian markets is proof of
this. Therefore, even though the region will be able to avoid the current financial
crisis, an inevitable decrease in the growth rate will affect the poor and those that
have barely overcome poverty. Safety nets are thus essential in times such as the
present.
During preparation of the WDR2000/1, we must analyze carefully the effects of
a globalization that introduces instability, and thus affects the poor. That is why we
must continue to emphasize the study of globalization, volatility, vulnerability, and
safety nets, in order to be prepared for the challenges ahead. We must create a set of
various interventions (subsidies, temporary employment, and training) to protect
the poor. Structural adjustments must be made to protect these interventions. Other
crises will occur; we must be prepared to confront their adverse effects to avoid
affecting the poor to a point in which progress achieved in past years could be
totally reversed.
Session IV: Presentation of the World Bank Report on
Poverty and Development 2000/1
Nora Lustig, chief of the Advisory Unit on Poverty and Inequality of the Inter-
American Development Bank and assistant director of the WDR2000/1, and Ariel
Fiszbein led this session. Ram6n Daub6n, from the Kettering Foundation in Wash-
ington, was the moderator.
Lustig emphasized the report's innovative elements with respect to methodol-
ogy (an intensive consultation process), preparation (a research agenda to be devel-
oped in a decentralized manner), and the drafting team (multidisciplinary, with
extensive female participation, and including non-World Bank staff).
She presented the core elements of the WDR2000/1 proposal, based on the fol-
lowing propositions:
* Poverty is multidimensional. Measurement instruments must be improved.
* Despite the successes achieved in poverty reduction in the past, its levels con-
tinue to be unacceptable.
* The world is going through great processes of technological and economic
change. These changes represent a risk and an opportunity
With respect to what directly affects the region, 150 million people live with less
than two dollars per day. In addition, a large, high-risk group of people lives close
enough to the poverty line to be vulnerable to economic shocks. The region is also
- 8 -



Summary
characterized by major differences among regional, rural versus urban, and social
groups. However, despite this diversity, common characteristics are found among
the poor: they are generally from large households whose head has little education
and is unemployed. A clear relation exists between pov- rty and belonging to indig-
enous or black groups.
Given this situation, global growth trends are not sufficient to eliminate pov-
erty within a reasonable time period, despite the fact that 1 percent of per capita
growth generates between 1.5 percent and 4 percent in poverty reduction. There-
fore, other actions are required to fight poverty, including the following:
* Modification of income determinants: employment and labor regulation;
microenterprise support; asset redistribution (agrarian and urban reforms, taxes
on wealth); investment in human capital; rural development; policies in devel-
oped countries (migration, protectionism).
* Income-transfer policies: minimum-income proposal. A redistribution of 2 per-
cent of the gross domestic product (GDP) would be enough to eliminate pov-
erty.
* Protection against adverse shocks, economic and/or environmental.
Ariel Fiszbein then presented the proposed consultation scheme. Clearly, two
types of audiences should be reached by the process;
* Civil society in its broadest sense, researchers, and political representatives. This
would occur at the regional and national levels as two types of events-partici-
patory forums (such as this one) and dialogue spaces taking advantage of mod-
ern communication technology (e-mail consultation with civil society
organizations throughout the world, via the Internet).
* The poor themselves. The process proposes accessing 15 to 20 poor communi-
ties in 10 to 12 countries to find out their perceptions on poverty, its solutions,
and how policies affect them, as well as their relation with other actors-NGOs,
government, and international agencies.
One additional instrument will be used to reach both types of audiences: the
participatory studies on poverty at the national level undertaken by the World Bank
as part of its strategy to support the countries (CAS).
Ram6n Daub6n led the plenary discussion. The comments may be organized
around two types of concerns:
Regarding the methodology, consensus existed on the usefulness and impor-
tance of direct consultations with the poor. However, the need to expand these
consultations to other segments of society, particularly to privileged groups, was
emphasized, since their attitude toward the poor plays a crucial role in the politi-
cal economy of the reforms, as well as in manifestations of poverty such as exclu-
sion and discrimination. Using surveys and consumer panels promoted by the
private sector was also suggested, because they constitute a rich source of infor-
mation on the type, quality of life and structure of expenditure of the poor. Finally,
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
the greatest emphasis was placed on the importance of maintaining adequate com-
munication on the proposed research program and on the report itself. For this,
the WDR2000/1 team must turn to existing networks and organizations to dissemi-
nate and circulate all the rnaterials and to continue listening to the inputs of these
organizations to the debate. Once the WDR2000/1 is completed, its dissemination
is critically important. In order to fulfill its purpose, the report must reach as many
audiences as possible and be discussed in the most diverse spaces.
With respect to the thematic aspects, it was suggested that greater emphasis be
placed on the gender approach, as well as on racial aspects that may point to dis-
crimination and exclusion patterns. Social capital, especially that of the poor sec-
tors, must be the subject of special attention both as a diagnostic mechanism and
as a potential policy objective. The diversity and heterogeneity of the populations
in poverty status should lead to the establishment of typologies and thematic, geo-
graphic and economic distinctions that reflect the variety found among countries
and regions and among groups within a country itself.
The political economy of reforms, the consensus building around social poli-
cies, and the ranking of the latter in the national agenda were also considered
crucial. It is necessary to understand and study how these processes may be ad-
vanced to provide the political support required by the fight against poverty.
The need to evaluate the costs and efficiency of interventions must be addressed
by the research agenda. Various participants insisted repeatedly on the need to
estimate the costs of new policy proposals and to evaluate tne impact of existing
ones. With respect to the latter, it was suggested that the WDR2000/1 should in-
clude an annex describing the policies, recommendations and evaluations of the
"best practices" identified for poverty reduction, so that such information be shared
to benefit a large number of people.
Conclusion: The Future of the Forum
The final session was devoted to evaluating the forum and exchanging ideas and
proposals regarding its future. Bain focused the debate on three questions: (1) the
forum's usefulness as a regional and multisectoral space for discussion and pro-
posals, and thus its future; (2) the actors and sectors that should be invited to par-
ticipate but have yet to be included; and (3) the specific activities that should be
developed for the forum to fulfill its objectives.
The participants valued highly this forum, particularly because it allowed voices
from the different sectors to be mutually heard and listened to. They concurred on
the need to continue to this process, thus contributing to consensus and the accep-
tance of differences. However, many emphasized the need to prepare future activi-
ties far in advance, in order to allow greater depth in the discussion of the issues
and to obtain, thanks to annotated agendas, specific and feasible proposals. Many
of those present highlighted the forum's importance in terms of the change process
currently underway in the World Bank, as it seeks ways to open up to other audi-
- 10 -



Summary
ences. Other participants indicated the need for the poverty reduction issue to re-
ceive continued, not cyclical, attention.
Various specific activities were proposed:
* Articulate the regional forum with similar endeavors at the national level in
different countries, such as Peru, Mexico, El Salvador, Colombia and Argentina.
* Organize working groups electronically around common issues to share ideas
and make proposals to the whole forum and to the WDR2000/1 team.
* Create a bimonthly newsletter for forum members and an electronic mecha-
nism to circulate information that would allow the continuation of the dialogues.
With respect to the national dimension, the World Bank and the Inter-American
Development Bank presented their initiatives in Mexico and Peru.
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Knowledge as a Development Tool:
The Knowledge Bank
Vinod Thomas
Director, World Bank Institutute
Opening Remarks
Greetings and welcome to the first Latin American and Caribbean Forum on Pov-
erty, Inequality, and Vulnerability. This event promises to be the beginning of sev-
eral new partnerships that will foster work on the creation and dissemination of
knowledge on the global stage of development.
As many of you know, the World Bank has been undergoing an enormous trans-
formation over the last few years in its efforts to become a Knowledge Bank. No
longer just concerned with financial assistance and conditionality, the Bank realizes
it must develop a deeper understanding of the development needs of countries
around the world. The Bank focussed first on building roads, and then on making
Structural Adjustment Loans in the 1980s. We now understand that this is insuffi-
cient for achieving real and sustainable development. We understand that the solu-
tions to complex problems lie with people, not just with governments or with
multilateral agencies.
The Bank wants to move beyond the vision of constructing only roads and dams
to building international connections through knowledge. Its vision of becoming a
learning institution contributes to this goal, one of which is to create inroads into
the information highway that will give access to people who may have been left
stranded at the wayside.
But we must think of knowledge dispersal as more of a two-way street than we
have in the past. Not only do we need to develop links among think tanks, but we
need to start conceptualizing knowledge as an international public good. We must
also be willing to realize that knowledge created in developing nations is often key
to constructing a solid base. While we can import and impart knowledge as a pub-
lic good, we recognize that communities must play a large role in creating that
knowledge in the first place. We need to foster incentives to translate knowledge
into sound policy and to disseminate local knowledge on an international scale. We
need to learn from others, without repeating the mistakes of others. For this, knowl-
edge needs to be transferred across international borders; the information high-
ways must cross through what were once seen as impenetrable barriers.
To fill these knowledge gaps, the Bank is fostering dialogue spaces such as this
forum to broaden the development paradigm. For it is not knowledge in the hands
of the elites, but knowledge from different sources and shared by all, that will ulti-
mately have a positive impact around the world.
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Knowledge as a Development Took: The Knowledge Bank
Two weeks ago, I attended the World Bank-Intemationl Monetary Fund An-
nual Meeting where Mr. Wolfensohn, president of the World Bank, noted that "we
need a new development framework." He emphasized that we must learn from the
past, and that the way in which a development framework is developed and ap-
plied is as important as the contents of that framework.
As he stated:
What if it were possible for governments to join together with civil society,
with the private sector, to decide on long-term national priorities? What if
it were possible for donors to then come in and coordinate their support,
with countries in the driver's seat, with local ownership and local partici-
pation? What if it were possible for these strategies to look 5, 10, 20 years
ahead, so that development could really take root and grow and could be
monitored on an ongoing basis? Too ambitious, some will say. Too uto-
pian. But what if I told you it is already happening?
In El Salvador today, there is a national peace commission, born of
civil war, which together with civil society, the private sector, and the gov-
ernment, is drawing up a list of national priorities-so that those priori-
ties can extend beyond the life of one government and become part of a
national consensus for the future. And the same thing is happening in
Guatemala and is being considered elsewhere in Latin America.
He emphasized the need for a new approach to development partnership, led
by governments and parliaments, influenced by the civil society of those countries,
and joined by the domestic and international private sectors, and by bilateral and
multilateral donors.
Despite Mr. Wolfensohn's encouraging statements, we still have a long way to
go to arrive at a place where partners are at the center of strategic discussions. At
the Annual Meetings, I had the opportunity to read dozens of country briefs and it
is amazing how little these briefs have changed compared with those of 10 years
ago. The majority of them still focused on tackling short-term macroeconomic is-
sues, and very few touched on issues of learning or incorporated knowledge as
part of their overall strategic objective.
The country meetings in which I participated focused on these briefs. I know
the interest in learning and partnership work is there on the side of our clients and
donor-partners, and that the direction is there, but we aren't there yet.
The good news is that gender and development issues are becoming mainstream
in these meetings. Also, the expansion of Economic Development Institute (EDI),
the creation of Learning and hinovation Loans (LILs), and the fact that the Bank
now has participatory Country Assistance Strategies (CASs) all signify a change.
But the bad news is that we still have several country briefs and discussions com-
posed as if the Bank, rather than the country, were in the driver's seat, and as if the
government of a country were the only player in a country's development work.
I was the director of WDR1991, titled The Challenge of Development. I was very
much interested in the views of diverse groups of people and did seek their inputs.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
But the report was still written by a small team, and I can't say the process was fully
participatory. The new WDR2000/1 shows how much we've changed.
The most visible product of the WDR2000/1 will be the report itself, providing a
synthesis of the relationship among development strategy, structural and social
development, and poverty. But there will be other products, not least of which will
be the intensive process of consultation born out of events like this one, especially
the interaction with poor communities directly and through participatory research
and projects. The research program will produce a combination of conferences and
also research papers, with strong participation of researchers from developing coun-
tries.
Broadening the Bank's learning agenda cannot be done without knowledge. All
World Development Reports should become more than mere documents. They should
be used as platforms upon which to broaden the knowledge agenda.
Today we will be discussing a report on poverty that delves into social develop-
ment issues and is very participatory. Let us use the WDR as a catalyst to foster
informed research groups on a wide range of development issues. We need to work
beyond the WDR, by furthering research and policy work in the areas of gover-
nance and anticorruption, as well as areas of gender and inequality
The Bank wants to listen, to participate in, and to facilitate these discussions.
After this meeting, we are launching a poverty and inequality Research Net-
work of Latin America and Caribbean (LAC) Region researchers (many of whom
are in today's audience) to encourage informed dialogue on issues of poverty and
social development. This will be a joint venture with the Inter-American Develop-
ment Bank (IDB) and the Latin. American and Caribbean Economic Association
(LACEA).
The consultation for WDR2000/1 will be done through many instruments and
media, including conferences and workshops primarily focused on the research
program. The workshops will serve as venues for authors to present papers and get
feedback from other researchers and from practitioners. Knowledge that comes out
of forums like this one is particularly important. We need to work together to mobi-
lize the intellectual energy in regions like LAC. We need to mobilize resources in
LAC to create broader consensus on social development. Your active participation
in these workshops is crucial to help build a knowledge base upon which develop-
ment work can flourish.
Let us work together in the spirit of partnerships to begin the next millennium
on a solid foundation.
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The New Context of Poverty Reduction in
Latin America and the Caribbean
Robert Ayres
Principal Social Scientist, World Bank
In 1990, I had the privilege and responsibility of being a member of the team that
produced the World Development Report on Poverty (WDR1990).
First, let me begin with a sobering fact. The report estimated that approximately
19 percent of the population in Latin America and the Caribbean were living in
poverty. The report also attempted to project the incidence of poverty in the region
for the year 2000. Making certain favorable assumptions, the report projected that
poverty in the region would fall to about 11 percent by the year 2000. In fact, the
World Bank's latest estimate is that approximately 38 percent of Latin America and
the Caribbean's population continues to live in poverty.
The fact that the incidence of poverty in the region is more than three times
what WDR1990 projected it would be illustrates the enormous challenge that con-
fronts us as we seek to analyze the problems of poverty, inequality, and vulnerabil-
ity, and to identify priorities for future actions against poverty.
As many of you are undoubtedly aware, the 1990 World Development Report
elaborated a framework for poverty reduction that has guided much of the World
Bank's work during the current decade. It had three important emphases: first, eco-
nomic growth that would be "broad-based" and "inclusive" and that would make
productive use of the poor's most abundant asset-that is, their labor; second, hu-
man capital development, with an emphasis on the delivery of quality education
and basic health care to the poor; and third, the provision of social safety nets for
those left out of the process of economic and social development. One of the impor-
tant questions that will confront the authors of the World Development Report in the
year 2000, and that will undoubtedly occupy us during our discussions over the
next two days, is whether this poverty-reduction framework still remains viable in
the light of changed circumstances.
Despite the 1990 World Development Report's achievements, which were consid-
erable from both an analytical and operational point of view, it was obviously not
without its shortcomings. What, then, are some elements of a critique of the re-
port-or, to be more precise, of my critique?
1. The report's analysis was excessively rooted in an exclusively economic ap-
proach to poverty and its reduction.
2. The report adopted a quantitative definition of poverty, measured solely by the
presumed adequacy or inadequacy of personal income.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
3. It gave relatively little attention to inequality or to vulnerability.
4. It paid little attention to issues of social development and social capital.
5. It had little (or virtually nothing) to say about the political economy of poverty
reduction, or about the political feasibility of the report's recommended strategy.
6. The 1990 World Development Report said little about prospective structural changes
in the global economy and their likely impact on the poor in the developing
world.
Permit me to turn briefly now to what has happened-in my view-since 1990,
first, in the so-called "real world," and, second, in academic perceptions of poverty
and development.
Regarding changes in the world around us, I would like to point to a half-dozen
"megatrends" that I believe have radically altered the context in which issues re-
lated to poverty and its reduction need to be addressed. My list is as follows:
1. globalization-at least with regard to trade and financial flows
2. liberalization of domestic markets
3. privatization of previously publicly owned enterprises
4. democratization, with its numerous dimensions-including the holding of regu-
lar and relatively free elections, the increasing importance of the legislative
power, and the proliferation of the diverse forces in civil society
5. reform of the state-not only administrative reform of public bureaucracies to
make the state leaner and more efficient, but also a redefinition of its role in the
economy and social sectors
6. decentralization, in both its fiscal and political dimensions
I would like to suggest to you that the implications and consequences of these
various megatrends for the poor have been insufficiently explored. A useful way to
assess the new context would be to attempt to gauge the net effects on the poor in
Latin America and the Caribbean of various developments that have accelerated so
markedly since 1990. For example:
*  Globalization could help reduce poverty through its presumed effects on growth,
or the possibility of increasing the export of products that are labor intensive.
But it could also exacerbate disparities in wage levels between skilled and un-
skilled labor, and it could significantly increase the vulnerability of large seg-
ments of national societies, thus markedly increasing the demands on
instruments of social protection.
*  Liberalization of domestic markets could make the whole economy run more
efficiently and productively, even for the poor, but it also might prohibitively
increase the prices of items that are disproportionately consumed by the poor.
*  Much the same can be said for the effects of privatization on the poor. Will they
be able to afford the newly privatized electricity, telephone, water, sanitation,
and other basic services? If not, how can we ensure that these services become
accessible to those with low incomes?
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The New Context of Poverty Reduction in Latin America and the Caribbean
* Is democratization really increasing the participation and representation of the
poor in national political systems, or is it simply providing a facade for "politics
as usual"? Who speaks for the poor-especially at the national level-in the
newly democratic political systems of Latin Ameri^a and the Caribbean? Are
grassroots organizations of the poor enough to ensure that their interests are
systematically represented in execufive and legislative decisionmaking in na-
tional capitals-or even in municipal councils and provincial or regional as-
semblies?
* In theory, a reformed state can deliver both traditional and nontraditional ser-
vices better to poor and nonpoor alike. In practice, many questions exist con-
cerning the provision of such services to the poor by the so-called "reformed"
state. For example, will educational vouchers or an increasingly privatized edu-
cational system help the poor? Where do they fit into the reform of health care
financing?
* Decentralization doubtless can bring greater "voice" and services to the poor.
However, it can also bring "neo-caciquismo" and the capture of benefits by well-
entrenched local elites, thereby increasing disparities between rich and poor
areas.
At the most general level, these observations raise the issue of whether the de-
velopment model prevailing in the region today is really capable of significant and
sustained reduction of poverty.
For some of us, the current challenge may be characterized as how to give the
neoliberal model a more "human" face, not how to replace it with something else.
For others, however, the quest is for a true social democracy in the region. In any
event, the fundamental question is whether the poor in Latin America and the Car-
ibbean would fare better under a significantly different development model from
the one prevailing in the region today and, if so, what such a significantly different
model might be.
To conclude, I will limit myself to just three broad observations concerning new
perceptions of poverty issues. They are as follows:
*  First, there is what I would call the "rediscovery of inequality"- a height-
ened awareness of the linkages between inequality, growth, and poverty re-
duction. Agreement is increasingly widespread that development in Latin
America and the Caribbean has been narrowly based and exclusive. In fact, it
has been virtually the antithesis of the broad-based development strategy rec-
ommended by the 1990 World Development Report. The question is, what to do
about this situation and, in particular, what are the policy tools for doing any-
thing about it?
* The second changed perception stems from the discovery that "social develop-
ment" has its own independent importance in contributing to poverty reduc-
tion, as well as the fact that it is related, perhaps quite strongly, to economic
development. We require much greater attention to the determinants and con-
sequences of "social capital" among the region's poor.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
* Third, and finally, is the discovery, also rather recent, that "institutions matter."
The reduction of poverty in Latin America and the Caribbean requires enhanced
institutions-whether in the education, health, and financial sectors, or in the
judicial system. More generally, we must give substantially greater attention to
the political economy aspects of poverty reduction in the region. In many areas,
a broad consensus exists on the necessary actions to reduce poverty. Political
obstacles are often preventing the implementation of what needs to be done,
and we need to think more creatively about how they can be overcome.
What does all this mean for this meeting of the Forum on Poverty, Inequality,
and Vulnerability? For me, it means that the subjects we are about to address are
significantly more complex than they were perhaps made to appear in the 1990
World Development Report. It means that poverty and related topics are even more
central to the development debate in the region today than they were a decade ago.
It means that we know a lot more, and of a more multifaceted nature, than we knew
then-but that the gaps in our knowledge are still notable.
In summation, it means that this forum is beginning a truly challenging and
exciting venture that demands-and I am sure will receive-your sustained atten-
tion, analysis, commitment, and participation.
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After Neoliberalism: A New Path
Jorge Castaneda
Professor, Universidad Nacional Aut6nima de Mexico
and New York University
To an overwhelming extent, Latin American societies, unequal for ages and divided
in countless ways, are now more fragmented than ever. In a few countries, poverty
decreases, but injustice remains. In most others, the number of citizens condemned
to miserable, unacceptable, and outrageous living conditions increases, while the
gaps dividing rich and poor, abysmal in themselves, widen, along with those that
separate the cities from the countryside, blacks and Hispanics from whites and
natives, men from women, and children from the rest of the society. Employment
remains stagnant, income continues to be puny, and expenditures on education,
health, housing, children, and the "future" cannot make up for the countless lost
decades. Our emerging democracies are constantly threatened by the possibility of
coups d'etat, by poor economic outcomes, and by the understandable apathy of a
population overwhelmed by the burdens of daily survival and the persistent feel-
ing of not belonging.
The still unfinished nature of our national identities is being devastated by a
merciless globalization-blown out of proportion by the media-that constantly
overpowers the frail sovereign nations constituted only in the last 150 years.
We must undertake to remedy, to improve-in a word, to reform-this situa-
tion in a world that is both more and less resistant to change. The narrowing ideo-
logical parameters, added to the imperative to abide by the requirements of capital,
trade, and people flows, have reduced the maneuverability of each nation, of each
government, of each party or movement. To be blind to these facts is not just futile
but destructive for both the beneficiaries and the victims of the millennium's-end
apportioning of vices and virtues. But the same transformations wrought during
the century's final decades have partially opened new possibilities for change, for
the battle, and for the advancement of utopias previously unimaginable. The tech-
nology available only to some (although in theory utilized by all), the end of the
cold war and the phenomena of regional integration, the possibility of stripping
social reform efforts of nineteenth-century ideological connotations, the growing
awareness that if the world is global it is also unique-all of these are planks in a
new, feasible staging, one that will allow the development of societies that are fairer
and more united, freer and more aware, at peace with themselves and at home
within a financial, ecological, commercial, and judicial universe that is less aggres-
sive and polarizing.
We must leave behind the neoliberal policies that have drawn the market away
from its role as an instrument and instead raised it to the status of a religion. We
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
distinguish between the market economy (and its need to be democratized) and
neoliberalism. The latter, an extreme stream of the market economy, has failed to
generate growth and development, particularly when faced with the challenge of
achieving a more equitable distribution of income and wealth. Today, the notion
that capital is the determining and almost exclusive factor of economic processes
has been manifestly discredited. The policies of privatizing at any price, of system-
atically reducing taxes, and of deregulating labor markets so characteristic of the
neoliberal approach have. in the majority of cases, served to aggravate social con-
flicts and tensions and to increase the poverty level of huge sectors of the popula-
tion. We do not just reject the idea of humanizing neoliberalism, however; we also
suggest an alternative approach: to democratize the market economy
Obviously, the pursuit of this aim involves major dilemmas: If we propose re-
forms that are too far removed from the status quo, they will be labeled attractive
but utopian. If we propose transformations limited to the current situation, they
will be considered viable yet insignificant. This is, indeed, a false dilemma, pro-
duced by the lack of understanding that changes occur in a timely and cumulative
way. Any change management worth considering can be unmade by arguments
either close to or distant from reality. What matters is how change is managed, and
how it effects the people's understanding of their interests, their identities, and
their problems.
Economic and financial globalization accelerated the universal expansion of
the so-called "unique thought," the neoliberal doctrine that in Latin America ac-
quired features and embellishments absent in the industrialized countries' ver-
sion. Several countries in the region adopted the most extreme version of this
economic organization, thus considerably restricting the role of public policies and
of state regulation. In neither the Japanese experience (and that of other Asian
countries that have developed a market economy) nor in the European model has
such a small margin been left for the regulatory or proactive mechanisms of the
state. Even in the United States, areas are reserved for state action that are un-
known in some Latin American models of the market economy. Those models re-
sult from the logic of the "financial capital" that does not recognize controls and
that flows to areas with the most lax regulations, and also from the actions of these
same national states that, because of an ideological exaggeration, have decreased
their regulatory mechanisms. Hence the development of the following sequence
of events:
* Globalization creates the conditions for the unrestricted circulation of capital
and its almost immediate reallocation for the maximization of profits.
*  Financial logic, sustained by a US$1.3 billion volume of daily transactions, tends
to prevail over productive logic.
*  The capacity of speculative capital to flow towards areas with the fewest re-
strictions leads the whole system, and each country, to adopt a downward ap-
proach to deregulation or reduction of controls.
*  This tendency towards deregulation increases even more when the consequences
of national policies driven by extreme neoliberal models are added. Under these
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After Neoliberalism: A New Path
circumstances, the financial and speculative logic tends to dominate national
economies.
The phenomenon is further expanded when it[?who concludes?]is concluded
that the advent of a "single world" will sooner or later render national states
anachronistic.
Public power is therefore subjected to the financial and speculative logic, the
fate of societies escapes from the decisions of their inhabitants, and, in short, we are
led into a world devoid of premeditated purpose or, in any case, of majority deci-
sions, in which the power to shape the future is lost.
But this is neither an irreversible fate nor an unalterable scenario. It is only a
probable future, one that can be altered. It will be impossible to do so, however, if
the internal sovereignty of the state-in other words, its capacity to implement poli-
cies elected by the majority-is not strengthened in some cases, or reconstructed in
others. A state is not sovereign when a private power has more authority in the
definition of a society's objectives or when an everpresent but devoid of non-terri-
torial financial logic prevails over nations. This state's sovereign capacity has little
to do with the classic argument pertaining to its dimensions or its levels of inter-
vention; it refers rather to the state's existence as a public power, as the executor of
democratic will. This argument is the starting point of our proposal, and the exact
extent of its aims.
Latin America's link to the global economy and to the international community,
particularly to so-called financial globalization and large capital movements that
traverse and shake the world, can be redefined on three levels, each one supporting
the other. At the national level, it is both feasible and desirable to implement vari-
ous regulatory mechanisms on speculative capital from abroad, along with giving
priority to the domestic savings that reduce dependence on these flows. Through
various entry and departure taxes-similar to those that already exist or that have
been in force in several countries such as Chile, Brazil, and Malaysia-and encour-
agement of direct foreign investment (as opposed to portfolio investment), it is pos-
sible to increase the margin of (relative) autonomy in the nation-states.
Second, regional economic integration processes such as Mercosur, Colombia-
Venezuela, and the efforts to revive the Central American Common Market offer
additional possibilities for regulating and legislating relations with worldwide capi-
tal circulation networks. Obviously, the capacity and effectiveness of regulatory
measures will be greater at the regional rather than the individual country level,
because the markets in question are bigger and more attractive, and the costs are
higher for those deciding not to enter those markets because they reject the limita-
tions set by integrated countries.
Finally, we must promote proposals for regulation or taxation (for example, the
Tobin tax proposed by the late President Francois Mitterand) of speculative capital
movements at the international level, in multilateral financial organizations, and in
other forums. The use of market mechanisms to redefine the relations between coun-
tries and regions and the new globalization phenomenon are the keys to construct-
ing new forms of sovereignty.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
Regional economic integration must not only be supported, but also must go
much further, covering more areas and being more ambitious than at present. The
error of integration as presently envisioned and implemented lies in the fact that it is
restricted exclusively to the commercial sphere; we must simultaneously reduce tar-
iffs among our countries, and start building the regulatory institutions, social unions,
and common policies that in other parts of the world were created over times. The
only way to avoid the sense of alienation that the citizens of other countries experi-
ence with bureaucratic entities distant from and free of any accountability is to gradu-
ally build social solidarity among the participating countries. This is particularly
relevant to the case of Mercosur, which should further explore a privileged associa-
tion with Chile. We must seek a greater degree of integration among ourselves and
among equals. To this end, we must promote the encounter of political, social, civic,
and professional actors from our countries. Economic integration is too important to
remain solely in the hands of commerce or finance ministry bureaucrats.
A democratizing development is needed, based on (1) the reorganization and
the refinancing of a state that is proactive and equipped with abundant resources,
capable of investing in individuals, and of becoming a powerful and useful pro-
moter of private initiative, especially of small and medium-sized enterprises (SMEs);
(2) the struggle against the rigid and tragic dualism between the economic and
social vanguards and rearguards that divide all our countries; and (3) the strength-
ening of democracy by means of institutional reforms that favor the implementa-
tion of required structural changes and that generate, in daily civic and social life,
an authentic, liberating shock. Until now, persistent efforts to reduce inequality
solely through compensatory social policies have failed. We must not fear a freer
democracy. We must insist on the possibility of and the need to create political and
economic institutions based on new types of links between representative democ-
racy and citizen participation that make human and economic development a pri-
ority. Poverty should be measured not only by lack of income, but also by lack of
basic opportunities for individual development. To the extent that access to the
basic goods of development is missing, we will be poorer. Consequently, particular
attention must be paid to political and economic institutions in order to include
those who are excluded from development's fruits.
We do not wish to revert to populist nationalism, nor to the semiautarchic strat-
egy of import substitution that ends up protecting inefficient domestic oligopolies.
Nor do we want to revert to the inflationary public financing of other times. We are
advocating a strong and democratized state, not the state that we presently have or
had in the past. We want to democratize the market economy and return to a de-
mocracy that is capable of fighting inequality. The market must be the main dis-
tributor of resources, but it falls on the state to create the conditions that enable the
needs of the poorest sectors to be converted into sound claims that the state can
process. We reject the idea that the market economy adopts the natural and neces-
sary form of economic institutions that are predominant today in industrialized
democracies. We insist on the possibility and the need for institutional innovations
that contribute to real economic decentralization in hierarchical and excluding so-
cieties such as our own. We want to create the bases for a new generation of na-
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After Neoliberalism: A New Path
tional development projects that transcend the erroneous choice between submis-
sion to the new rules of the international economy and to faith in the development
authoritarianism of a guide-state. We are not proposing a third option, since a sec-
ond one does not exist. We are proposing a democratizing alternative to the path
that is wrongly flaunted as the only one.
In recent years, the region's unionism has changed from earlier conceptions to
the so-called "sociopolitical unionism." The latter has adopted less conflicting posi-
tions on regional integration, advocating the inclusion of social clauses and char-
ters that limit competition among workers, thus guaranteeing a core of basic rights.
Of particular importance are collective bargaining, trade unionism, nondiscrimina-
tion, and the abolition of child labor. Value is also given to worker participation,
always through collective bargaining, in order to guarantee the competitiveness
and productivity of enterprises. This unionism tends to be defined by what we
might call the democratization of globalization, extending "social citizenship" to
workers and those excluded.
Basically, the notion of social citizenship can become the core of a new social
policy in Latin America that originates from a historical fact recognized in other
parts of the world: it is impossible to build united, democratic, and stable nations
without extending the same rights of social citizenship to a majority, at least, of the
inhabitants of a given territory. In the long term, the division of political-legal citi-
zenship and of social citizenship, characteristic of current Latin American democ-
racies, is unsustainable. Moreover, transformations in the market economy and a
revolution in mass media have resulted in the expansion, in industrialized coun-
tries, of the rights traditionally identified with social citizenship. Such expansion
does not take place in isolated compartments: it is immediately communicated to
developing countries.
One of the best examples concerns access to credit in the form of mortgages, or
as medium or major consumer loans (for automobiles, for example). It is unlikely
that access to credit was considered a right of Marshallian social citizenship in the
nineteenth century, or even during the first half of the twentieth. However, today it
is so considered in industrialized countries, thanks to various public and private
mechanisms; this is not the case in our nations. Thus the gradual building of social
citizenship in Latin America is the great challenge of the immediate future and a
condition for the survival of the evolving hemispheric democracy.
A strong, active, supportive, and refinanced state is needed in order to realize a
democratized market economy. The tax system should provide an increased public
income that rises progressively to international levels. We should bear in mind that
until now, no country has succeeded in generating a stable social balance with pub-
lic expenditure levels lower than 30 percent of the gross domestic product (GDP).
To reconcile an increase in taxes with the requirements of savings and private in-
vestment, we have to assign an important role to the set of taxation instruments. If
adequately implemented, the indirect taxation of consumption, generally achieved
through the value-added tax, could help to achieve this objective; its regressive bias
can be more than compensated for by the redistributive effect of the social expendi-
ture it will allow.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
Three types of direct and highly distributive taxes deserve special attention: a
direct and progressive tax on every citizen's personal consumption (taxing the dif-
ference between total earnings and established savings); an estate tax, especially
with regard to inheritances and grants; and a natural resource tax that allows the
nation to capture part of the income derived from a favorable supply of resources.
The exemplary punishment of the big tax evaders and the widening of the taxpayer
base will complete the task of tax system reorganization.The state's fundamental
obligation is to optimize the fiscal resources that it receives from society. Latin
American governments must completely eradicate corruption, dishonesty, and in-
efficiency, so that the management of every fiscal peso yields maximum productiv-
ity in social and human development terms.
In some countries, a burdensome domestic debt demands an enormous part of
public income and causes extremely high interest rates. the state's economic sanity
needs to be restored. To this end, privatization of public enterprises may be advis-
able, as long as the resulting profits are used to reduce domestic public debt and to
lower the interest rates paid by the government -and by private agents at inter-
national levels. We reject measures to finance current expenditures or external defi-
cits through the sale of state assets. Privatization is an economic policy resource
that is circumstantial in nature; it is not an ideological bias or dogma. New public
enterprises can be created tomorrow, while others are privatized today. We must
also use privatization to divide up property and increase competition, avoiding the
substitution of public monopolies with private monopolies or oligopolies. Above
all, we must create three mechanisms, the absence of which has contributed to higher
costs for our nations during the privatizing euphoria of recent years. First, a long-
term national development strategy should be established that delineates the ma-
jor parameters for the privatization and the conservation or creation of public-sector
entities,, and that also defines the administration standards-subject to market cri-
teria-of the latter. Second, transparent fiscal institutions that control the sale of
state assets must be created, not only to prevent classic vices such as influence ped-
dling, sharing of privileged information, or prices below market value, but also to
ensure that the buyers are acting in the national interest, and that their resources
come from lawful businesses and means. Finally, the regulatory framework neces-
sary to ensure the adequate performance of large-scale private enterprises that pro-
vide public services in a semimonopolistic manner is conspicuously absent in most
of our countries, and must be established. Without such regulatory frameworks,
privatization may prove counterproductive and onerous.
The state must guarantee a basic set of social rights for all, recognizing that a
social compensation policy can only intensify and never substitute for the struggle
against economic and social dualism-, that is, the gulf that in our countries sepa-
rates the privileged and organized sector of the economy from the backward and
disorganized sector. These social rights must give priority to children and to educa-
tion, guaranteeing children access to schools that, in addition to knowledge, pro-
vide them with daily food and medical care. Assistance to children must be
complemented by assistance to mothers, especially those who are single heads of
famvily or heads of households. In some Latin American countries, about half of
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After Neoliberalism: A New Path
working-class families are headed by women, while men serve as unstable part-
ners. The state must guarantee equal access to the education project for each and
every one of its citizens. More than anything else promoting the gap between rich
and poor is the lack of opportunity for the poor and those excluded from develop-
ment to participate in the education process up to the university level. This defi-
ciency may be corrected with intelligent policies, technological modernization of
educational processes, and through distance, electronic, and televised education.
Current projects cannot stop at the sixth grade of elementary school or, in the better
cases, the secondary level. As a matter of urgency, the state must set up mecha-
nisms to ensure that public education includes each and every one of its citizens,
covers each and every level of education, and reaches every part of its territory.
When citizens are provided with higher levels of education, with knowledge and
technology, sustainable development will be truly guaranteed. Thus, investment in
human development will be much more important than other forms of govern-
ment investment.
The school's mission in a democracy is to analyze the possibilities of imagina-
tion and of life that society is incapable of confronting. Schools must be the voice of
the future (and its alternatives) in the present; they must recognize the child as the
worker of the future, the citizen, the small prophet. It is essential to prevent a spe-
cific authority of the government-even of the community itself-from having a pre-
ponderant voice in matters relating to educational content. A system of multiple
responsibility, of multiple financing, of multiple orientation-federal, state and
municipal-will free public schools from exclusive dependence on local control
and will provide them with the economic and cultural resources to create free men
and women.
We must begin to unlink basic social rights from employment in order to avoid
reinforcing existing inequalities. This can be done by increasingly financing those
rights through the central tax system, instead of through payroll taxes that reduce
the competitiveness of enterprises and intensify the division between holders of
stable jobs and the vast strata of unemployed or informally employed. Future de-
velopment of these rights calls for the extension of the principle of social inherit-
ance: everybody inherits from society, not just a privileged, family-endowed few. A
social account, opened in the name of each individual, is the practical means to
social inheritance. The amount in the account could be increased according to one
of two opposing principles: through special needs or vulnerabilities or through spe-
cial merits, competitively proven.
The idea of unlinking social rights from employment is directly associated with
the notion of social citizenship. In North Atlantic countries and in Japan, a large
part of the social rights that constitute social citizenship-medical insurance, pen-
sion, vocational training, unemployment insurance, transport, and housing-are
linked to employment. In some cases, they are part of a nonmonetary salary, in the
form of benefits, and are financed by payroll taxes. This has been so for more than
a century in some cases: on the one hand, this mechanism allowed a certain gradu-
alism-those that secured employment, at the beginning at least, gained access to
certain social rights (and to certain political ones through the extension of universal
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
suffrage). At a later date, the mechanism assured ample coverage in periods and
countries in which there was full employment.
But in societies where political rights are already in force and where full em-
ployment is, in the best of cases, a distant hope, making the enforcement of social
rights a condition of employment and financing them through payroll taxes could
be catastrophic. In fact, the great defect bequeathed to our countries by the now
simplistically vilified populist regimes of the 1930s and 1940s may originate in the
association between social rights and employment, transferred to societies unsuited
for such association.
For this reason, it is advisable to start, through the central taxation system, an
unlinking and financing process affecting social rights already existing but of re-
duced quality-such as public education-and the remainder: health, housing,
unemployment insurance (or negative income tax), support to counteract poverty,
pension, vocational training, and so forth. The costs will be undoubtedly higher as
coverage is expanded, but the search for fiscal financing mechanisms outside the
payrolls may also serve to reduce the social responsibilities of the business sectors,
and to improve the competitiveness of enterprises. Without reducing existing rights,
it is essential to begin exploring this rich vein of possibilities.
It could well be that the struggle against inequality should be considered from
a different historical perspective analogous to the fight against racial discrimina-
tion in the United States-in other words, to see it as a deliberate and active at-
tempt to rectify a status quo in the face of ancestral inequality that is linked in some
way, albeit enigmatic, to the conquest in Latin America. We have known for some
time that any social or economic effort in Latin America that does not take into
account the enormous inequality prevailing in practically all the countries of the
region only reproduces the existing inequality. At the same time, it is evident that
this inequality has historical roots: it is not the product of a current situation, but
one originating from the reproduction of a previous situation that dates back to the
beginnings of the colonial period. Thus exists the analogy with North American
"affirmative action," that in spite of all its real problems and faults has produced
unquestionably positive results and enjoyed wide social consensus for several de-
cades.
The possibility of raising real wages above the limits imposed by the productiv-
ity gains has proven to be one of the thorniest, most controversial topics of our
discussions. On the one hand, all the participants agreed on the need to raise the
proportion of national income represented by the salaried masses. It is not enough
to raise nominal wages, or to increase employment with miserly salaries. At the
same time, although possible, it is not easy to impose income increases without
productivity increases. We all recognize that salary appreciation must be backed
up by increased rights to work, without falling into the straightjacket of employ-
ment stability: the dismantling of labor rights. We must adequately resolve the ten-
sion between the need to create stable, quality jobs and the need for negotiated
instruments that reduce the weight of nonsalary labor costs on companies. Only a
new development cycle, sustained by an enriched state and by increased domestic
savings, can reconcile salary appreciation with an extended labor market.
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After Neoliberalism: A New Path
Any national development project, and above all an antidualist project, involves
raising the level of domestic savings and opening new links between private sav-
ings and productive investment. "Capital is made at home": nowadays, no country
can rely on the possibility of developing itself with money from others. Foreign
investment is much more useful the less one must depend on it. Wealth-generating
fiscal adjustment by the state (enabling public savings and an increase in social
expenditures and in public investments in infrastructure) and public organization
of private savings are two supplementary ways of mobilizing national resources
for development. The target should be a savings rate higher than 30 percent of the
GDP. Social security system reform provides a favorable opportunity to organize
and increase private savings. The combination of the "preestablished benefits" so-
cial security system (which guarantees a fixed pension, independent of price quo-
tations) and the "fixed contributions" system (which returns to pensioners what
they saved during their working life), makes the requirement for obligatory, pro-
gressive, and redistributive savings feasible. Thus an obligatory private savings
system is combined with a mechanism that redistributes part of the richest accounts
to the poorest ones.
However, increasing savings alone is insufficient. New channels between sav-
ings and productive investments must be opened. If even rich economies squander
a large part of the productive potential of savings in a financial "casino," and pro-
duction is largely self-financed through the reinvestment of profits, the nexus be-
tween savings and production in our countries is even more tenuous. We must
establish, beyond banking and stock exchanges, an additional mechanism to pro-
ductively mobilize savings: mutual funds, starting with social security funds, ad-
ministered through an autonomous management and financial responsibility system.
Some funds would offer incentives for direct investment in SMEs of the economic
rearguard. Because access to credit is extraordinarily reduced for the majority of
the population, the traditional financial system should be extended until it pro-
vides total coverage to the entire population, with institutions such as savings banks,
trust funds, credit unions, solidarity groups, and, in particular, microcredit institu-
tions guaranteeing access to this vital and elitist resource for all citizens, regardless
of their poverty, isolation, or education level.
Increased domestic savings, combined with the search for and creation of new
links between private savings and productive investment, is one of the conditions
of the new national project to democratize development. The consolidation and
realignment of monetary stability is another. Monetary stability is an unavoidable
standard. The traditional imbalances in Latin American public finances-with the
resulting inflation and foreign overindebtedness- were symptomatic of a weak
state that was incapable of imposing the cost of investment in individuals and pro-
ductive infrastructure on its wealthy classes. Nevertheless, once the stabilization
stage is completed, monetary stability must be freed from its dependence on the
overvaluation of the exchange rate, on salary compression, and on the high domes-
tic real interest rates. This can only be done through a wealth-generating fiscal ad-
justment on the part of the state that, by increasing the tax burden, is able to reconcile
increased fiscal revenues and a widened tax base with strengthened savings and
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
investment. We need a fiscal adjustment that enriches the state instead of impover-
ishing it.
The proposed development project must combat and, in the long term, end the
division between productive vanguards and rearguards. A development strategy
that adjusts to the current international distribution of comparative advantages and
disadvantages, and that encumbers all individuals with the same slow, painful scal-
ing that has proven unable to close the gap between rich and poor, advanced and
backward sectors, is unacceptable. A productive vanguard within each country in-
serts itself within the international network of vanguards, while the remainder of
society, supposedly pacified by a social welfare policy, waits its turn. The working
majority toils in the purgatory of underemployment or employment in an industry
made up of subordinate parts of the internationalized production process.
It is not necessary to choose between reducing the state to merely regulatory
and social activities and adopting a centralized industrial and commercial policy,
along the lines of northeast Asian economies. The right approach is to decentralize
the desirable alliance or association between public power (and its alternative poli-
cies of support and development) and private initiative. Instead of a unified Asian-
style strategy, Latin American countries require a flexible and decentralized scheme
led by a variety of funds, public and private banks, and support centers that, with
a wide margin of autonomy in decisionmaking, can position themselves between
central governments and SMEs. Networks of these small and medium-sized enter-
prises, linked through cooperative competition, should receive the support neces-
sary to consolidate and integrate themselves in the worldwide network of productive
vanguards.
The objective of this policy of bold, decentralized alliances between govern-
ments and enterprises is to combat economic and social dualism. A technological
vanguard, located in public and private enterprises, must perform two tasks: (1) to
reduce the dependence of international competitiveness on salary compression, and
(2) to make progress in the production of the equipment and materials that SMEs
can assimilate. The objective is to actively promote vanguard economic practices-
continuous innovation, reduction of the contrast between supervision and execu-
tion, and a mixture of cooperation and competition-outside the traditional
vanguard sector. Extending vanguardism requires a new type of linkage between
public power and private initiative. For example, agrarian reform is neither an ar-
chaism nor an exception; it is a matter of central importance. The successful experi-
ence of many rich countries in developing family-centered farming through
partnerships between government and small farms is an example to be followed by
our agrarian sectors.
The counterpart of antidualist development is the imposition of market logic on
all agents of the large private economy. Private oligopolies and cartels tolerated or
protected by the state, direct or indirect subsidies obtained by those who have ac-
cess to public favor, nepotism in large family enterprises, the offensive treatment of
minority shareholders, and the reduction of stock markets to mechanisms for at-
tracting capital without risking company control often transform our capitalism
into a travesty of the market economy. We must not allow the discourse on public-
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After Neoliberalism: A New Path
sector privatization to serve as a pretext for the state continuing to service special
interests and the private sector from continuing to receive the unjustified support
of the state. On the contrary, rearrangement of state support to small and medium
enterprises, strong antitrust legislation in favor of competition and against private
or public oligopolies, protection of minority shareholders against controlling share-
holders, fiscal punishment of obstinant large family enterprises, termination of shares
without the right to vote, and publication of benefits enjoyed by senior executives,
are all means to impose competition on those who claim to want it. They comple-
ment the work to end the division between the vanguard and the rearguard.
This type of economic program is compatible with nondogmatic free-trade. This
means that deprivatizing the state and strengthening democracy will empower the
strategic selectivity of the opening-up process, thus preventing selective, tempo-
rary tariff protection from serving only to transform political influence into eco-
nomic privilege. It means that the raising of domestic savings levels will free our
countries from the vicious circle of dependence on financial capital attracted by
high internal interest rates, while favoring the entry of capital dedicated to increased
production and productivity. It invalidates rigid distinctions between the manage-
ment of capital (free to circulate) and the management of work (trapped within the
nation-state). It involves the obligation to be active within the organizations of the
Bretton Woods system in order to prevent their functioning solely as enforcers of
prevailing ideas.
The antidualist development program is based on strengthening of democracy,
which involves institutional innovations. A first component of this program to
strengthen democracy is electoral authenticity and an organized and enduring civic
mobilization. It is not sufficient to respect popular suffrage: it is also necessary to
reduce the influence of money in politics. To this end, we must demand public
financing of campaigns and transparency of private contributions. It is crucial to
combine the austere measures so necessary in electoral campaigns in poor coun-
tries with the need to prevent corrupt and illicit financing, whether from interest
groups or drug traffickers.
At the same time, we have to open up mass media to society. In the majority of
Latin American countries, it has passed from heavy state control, especially in the
areas of electronic media and radiotelephony, to the overpowering control by huge
private monopolies. In the absence of adequate regulatory frameworks and with
the fragmentation proceeding from the cable and DTH systems in industrialized
countries, it is essential to promote measures that, without in any way reducing
freedom of expression and private ownership of the media, guarantee both plural-
ity and access in harmony with the aspirations of Latin American societies. This can
be achieved by limiting the concentration of concessions and frequencies, and by
decentralizing and diversifying the ownership of the media, as well as its produc-
tion of information and communication. Similarly, free access to the mass media of
political parties, social movements, and different sectors of society, including cul-
tural, ethnic and ideological minorities, must be increased.
An essential component of a program to strengthen democracy is the need to
make leaders liable and accountable. On the one hand, it is necessary to increase
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
measures such as revoking mandates by popular initiative, referendum by popular
initiative, making secretaries of state answerable to parliament, establishing an in-
dependent and legitimate public ministry to challenge the government in power,
and creating summary judicial solutions against abuse of power. With these re-
sources, filling the gaps between elections and rendering a watered-down version
of the equation "Democracy = Sporadic Elections" is possible. Similarly, the ap-
pointment of these authorities within the state-in regulatory areas and in those
concerning fiscal audit and corruption-guarantees an element of distance between
the supervised and the supervisors. On the other hand, core political and adminis-
trative activity should promote the community participation in formulating and
implementing government proposals and programs-above all, local proposals and
governments-taking care to ensure that the opportunity for participation does not
only result in a transferal of power to mobilized minorities. Brazilian experiences in
this area are especially interesting here.
An additional element of the democratizing political program is presidential
system reform. While we do not share the predilection for fragmentary
parliamentarianism, we believe that the presidential system copied from North
America is not entirely adequate for our societies. Consequently, if we retain the
presidential system in the light of its antioligarchical potential, we must cure its
major defect: the favoring of legislative impasses over reform programs. We must
supply the political presidential regime with mechanisms that enable a rapid reso-
lution of programmatic impasses, and that strengthen the power of states to make
decisions and to effect change. Such mechanisms include a series of instruments:
legislative privilege or "fast track," used to describe legal initiatives of a program-
matic or strategic nature that go beyond punctual law; plebiscites and referendums
called by agreement of the two authorities; and other mechanisms of direct democ-
racy that reconcile the latter with representative democracy.
The last proposal of this political program is to give a liberalizing shock to the
core of national life or (if preferred) to cause long and continuous explosions of civil
society that will allow the vulnerable citizens of Latin America to know their rights
and defend them. In our fragmented and heterogeneous societies, almost no one is
"just" a citizen: the number of groups, sectors, minorities, regions, and ethnic groups
who are victims of some kind of discrimination or oppression beyond those to which
all of society is exposed, both obliges and inspires us to adopt a policy of continual
activity. Women, youth, workers, indigenous communities, negroes and mulattos,
minorities of a certain sexual preference, oppressed ethnic groups, marginalized
religious sectors, and many other groups who suffer from the nonfulfillment of
their rights and aspirations must be encouraged to take action, and to claim spaces,
rights, and interests. We must multiply the practical means by which citizens may
confront racial, ethnic, and generic prejudices that divide society and intimidate
people. We must separate the correction of class disadvantage from compensations
for disadvantages of race and sex. The accumulated disadvantages of certain groups
must be the first target of a liberalizing policy.
A doctrine has propagated around the world that suggests there is only one
possible path to economic prosperity and political freedom. The task of reformers is
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After Neoliberalism: A New Path
limited solely to humanizing the implementation of that doctrine. Their program
winds up being that of their opponents, only with a "50% discount."
We, on the other hand, propose another path, one that associates productivity
with redistribution; that connects democratic strengthening to the conquest of so-
cial and economic dualism; that combines a strong, active, and refinanced state
with decentralized support to small and medium-sized enterprises, introducing
advanced and experimental economic practices that reach beyond traditional eco-
nomic vanguards. This path establishes the foundation for a high-intensity, popu-
lar policy and radically democratizes the market economy. It involves a sequence,
gradual but accumulative, of changes in economic, political, and social institutions.
It does not involve the humanization of the inevitable. It is rather, the alternative-
possible and necessary-to a destiny that we do not deserve.
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Poverty, Exclusion, and Access to Services:
The Role of Institutional Reforms
Ariel Fiszbein
Coordinator, Economic Growth and Povert, Reduction, EDI
In this session we will approach the issue of poverty, inequality, and exclusion from
a particular angle: access to basic services. I would like to focus on the role played
by institutional reforms in promoting a more equitable and inclusive pattern in
access to services. I would say that in this critical area we have more questions than
answers. Therefore, it is absolutely necessary to make a systematic effort to assess
the impact on poverty and equity of the different reforms and changes of an institu-
tional nature being developed in the region.
Introduction
Improving access to quality services constitutes a critical component of any anti-
poverty strategy. Traditionally, we have tended to focus our attention (at least within
the Bank) on services such as education, health, or drinking water. However, as
time has gone by, new services-such as justice or public safety-have begun to be
considered essential. By the same token, even though in a strict sense they are ser-
vices, access to housing or to credit also constitutes a critical aspect of the develop-
ment of strategies to fight poverty.
This emphasis on service provision as a strategy in the fight against poverty is
consistent both with an approach to basic needs that highlights the consumption
nature of those services, and one that highlights the fact that these services consti-
tute assets of a different nature. Thus, improving access to them promotes the accu-
mulation of human (for instance, in the case of education), physical (as in the case
of housing), and social capital (as in public safety). At the same time, looking at it
from the viewpoint of social exclusion suggests that an equitable access to basic
services is a precondition to promoting greater social cohesiveness.
Beyond the reasons why it is important to pay attention to the issue of access to
quality, basic services, the reality is that-with few exceptions-most countries in
the Latin American and the Caribbean Region (LAC) perform poorly when it comes
to ensuring achievement levels in education or access to drinking water consistent
with the prevailing income levels. As an example, it is worth mentioning that in
Brazil only 46 percent of children from poor families complete the fifth grade, while
in Zimbabwe, that percentage is 89 percent. Even though the highly tmequal nature
of income (and capital) distribution throughout LAC is generally acknowledged
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Poverty, Exclusion, and Access to Services: The Role of Institutional Reforms
(at least in the academic literature), the inequality among social groups and subre-
gions in the access to quality services is equally alarming, although it is mentioned
less frequently.
Traditionally, debates surrounding these issues have focused on the level of
public expenditures ("the government should spend more in education"), the effi-
ciency of such expenditures ("the government misuses the resources earmarked for
health"), and the effectiveness of such expenditures in targeting the neediest ("the
government apportions too many resources to serve high-income groups"). How-
ever, it can be argued that these are only symptoms of the deficiency of institutions
regulating such service provision, and that, therefore, institutional change is essen-
tial to deal with the problem.
Thus, the so-called "Washington Consensus" seems to be giving way to the
purported "second-generation reforms" that focus on institutional reform, under-
stood as the change in the rules of the game (formal-such as constitutions, laws
and regulations-and informal-such as standards and values) that regulate ser-
vice provision. These changes affect who is responsible for the different parts of the
process of providing a service (financing, production, delivery, quality control, and
so forth); what authority and capabilities they have to carry out those responsibili-
ties; and what incentives they have to discharge such responsibilities in a manner
that is conducive to offering quality services to the poor and/or excluded sectors.
In other words, what accountability mechanisms exist that to some extent would
force those responsible for providing services to serve the poor?
Ongoing Reforms
Fortunately, this is not just a theoretical discussion. LAC countries have already
been experimenting with different institutional reforms, in some cases for more
than a decade. Although it is not easy to classify those reforms-risking oversim-
plification-I would venture to group them in four categories: decentralization,
privatization, participation, and public-private partnerships.
Decentralization implies the transfer of responsibilities for service provision
from the national level to a subnational level (that is, provincial or municipal).
Privatization implies the transfer of responsibility for service provision from the
state to the private sector (particularly to the for-profit sector). Participation is un-
derstood as institutional reforms seeking to promote the role of beneficiaries in the
management of basic services. Finally, public-private partnerships constitute the
development of institutional mechanisms that go beyond the traditional bound-
aries separating the state from the market and civil society or the dichotomies be-
tween state-market or for-profit-not-for- profit, adopting mixed management
models.
In all these areas, we can find examples of reforms and innovations that-al-
though not always inspired by the objective of fighting poverty-have the poten-
tial of radically changing service provision conditions, improving or worsening
access to them by the poor.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
It is worth asking ourselves how much we really know about how these re-
forms are affecting the poor. Can we say-confidently and based on empirical evi-
dence-what type of institutional arrangements are more prone to improve the
access and reduce the exclusion of the least fortunate groups? Or, perhaps more
important, do we know the conditions under which these reforms could help fight-
ing the exclusion and inequality pattern noted above?
The answer is only partially positive. In the last years, we have taken stock of
several interesting studies offering partial evidence (for a country or subregion, or
for a specific type of service) on these questions. But I believe that we still do not
have the critical mass of evidence or any systematic methodological approach that
is necessary to answer the questions that concern us.
In approaching these issues we should ask ourselves three main questions. First,
what has been the impact of specific institutional reforms-for instance, the
privatization of the drinking water utility-on different social groups' access to
basic services, and what aspects of such institutional reforms explain that outcome?
Second, are the new institutional arrangements sustainable from the financial and
political viewpoints, and are the effects observed only short term in nature (as a
result of the introduction of the reforms), or, on the contrary, do they represent a
deep and lasting change in the rules of the game? Third, have the reforms in ques-
tion produced effects (expected or unexpected) that leverage and advance other
initiatives in the fight against poverty-for instance, strengthening the organiza-
tional capabilities of the-poor or improving relations between the State and civil
society? My comments are primarily addressed to the first of these questions.
A Bird's-eye View
It is beyond the scope of this meeting (and my capabilities) to try to offer a report
detailing the knowledge surrounding these four types of institutional reforms. Just
to "whet the appetite," I will try to review some critical points in each area. I am
sure that forum members-from different angles and based on a deeper knowledge
of the situation in their own countries-may expand and correct my concepts.
Decentralization
The movement towards state decentralization has been a very clear trend in LAC
during the last decade. We are aware that this is not only a fiscal decentralization
but also a political decentralization (through popular elections of mayors and gov-
ernors) and an administrative decentralization (through transfer of the responsibil-
ity for the management of various public services to the subnational level). Thus,
when evaluating the impact of this type of institutional reform on access to services
for the poor, it is necessary to look at the combined changes in the fiscal, political,
and administrative areas. Bolivia, Brazil, and Colombia are noteworthy, because-
when compared with other countries in the region-they show important progress
in the three dimensions mentioned above.
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Poverty, Exclusion, and Access to Services: The Role of Institutional Reforms
Let us begin by distinguishing between interregional impacts (have the poorest
regions benefited from this?) and interpersonal impacts (have the poorest persons or
families benefited from this?) of decentralization. Interregional impacts on basic ser-
vice provision depend essentially on two underlying factors in the institutional de-
sign adopted in decentralization programs. The first factor to be considered is the
extent to which the fiscal design offsets differences in fiscal capacity between regions
and localities. From this viewpoint, the prevailing experience in LAC is that fiscal
decentralization has implied a redistribution of resources towards rural and lower-
income areas. The adoption of intergovernmental transfer systems that are transpar-
ent, automatic, and based on formulas that incorporate necessary fiscal capacity
measures seems to offer an effective answer to the question of interregional imnpacts.
The second factor to be taken into account is the extent to which the transfer of
administrative responsibilities reduces the efficiency of the service -compared with
the centralized service-because of a low management capability in the most back-
ward localities. This is a difficult question to answer empirically, partly because we
have very little information on the evolution of local management capability in
response to decentralization programs. My own work in Colombia' and recent stud-
ies in Bolivia2 suggest that local management capacity, by itself, does not seem to be
a bottleneck. Beyond whether or not these results can be generalized, the important
message is that institutional design is key not only from a fiscal viewpoint (particu-
larly with respect to the transfer system), but also from an administrative view-
point. As long as the new rules of the game establish conditions for service delivery
that are impossible or difficult for out-of-the-way, small, or poorer territorial enti-
ties to meet, they potentially face discrimination that may decrease certain social
groups' and regions' access to services. . That is why certain authors have begun to
talk about the need for an asymmetrical decentralization that takes these factors
into account and assigns differential responsibilities, according to capabilities, so as
to control the quality of services.
From my own perspective, the interpersonal aspects are the most difficult to evalu-
ate, because the institutional factors conditioning results in this dimension are rather
complex. The basic question is: does the institutional design allow or facilitate situa-
tions in which the benefits derived from the decentralization of basic services are
captured by local elites, instead of contributing to improved access for the poor? In
fact, it is possible to divide the question in two parts with respect to the institutional
design underlying the decentralization programs: first, does this lead to the concen-
tration of political power in the hands of local elites? and, second, does it generate
enough incentives for those elites-notwithstanding their gaining or losing political
space-to address access of the poor and/or excluded groups to basic services by.
My reading of the available evidence is that, generally speaking, decentraliza-
tion is not leading towards a concentration of political power in the hands of local
I Ariel Fiszbein, "The Emergence of Local Capacity: Lessons from Colombia," 25 World Development
7: 1029-1043.
2 See, for example, Jean-Paul Faguet, "Decentralization and Local Government Performance." Paper
presented at the Technical Consultation on Decentralization, FAO, Rome, December 16-18, 1997.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
elites. Bolivia-from which we are only now beginning to draw results based on
systematic research-seems to suggest the opposite. The institutional design in this
area is directly linked to the characteristics of political decentralization. The exist-
ence of local elected authorities may seem to be a necessary condition, but it is not
enough. The existence of legal mechanisms favoring the monitoring of public man-
agement and citizen involvement, as in the case of Bolivia, and the characteristics of
the electoral system at the local level also seem to be important factors.
However, the evidence (not only from Bolivia but also from countries such as
Brazil and Colombia) suggests that, independent of the formal rules of the game
regulating citizen involvement, decentralization's main impact is the emergence
of a new generation of local political leaders who are more capable and less tradi-
tional. In fact, some of the most interesting mechanisms of democratization in
decisionmaking at the local level-such as the participatory budget in the Brazil-
ian city of Porto Alegre-have occurred in the absence of legal standards.
The assumption that greater concentration of power in the hands of local elites
will necessarily lead to the reduction of access to quality services by groups in pov-
erty status or to an increase in exclusion, assumes that those elites do not have enough
incentives to be concerned by those issues. Once again, the institutional arrange-
ments adopted may play an important role in the creation of those incentives.
An example of the type of such institutional design is the use of a targeting
system (such as the SISBEN in Colombia) that forces local governments to follow
certain consistent criteria in assigning public expenditures (and, in a more general
manner, in delivering services) to benefit the poorest sectors. On the one hand,
through these regulatory systems decentralization may help the poor by limiting
the autonomy of local governments in deciding who will benefit-an attractive
option, assuming that decisions at the local level are strongly influenced by elites
devoid of sensitivity to the interests of the poor-and imposing certain controls on
the cientelistic practices prevailing in the region. However, this type of system is
certainly controversial-first, because it assumes the existence of commonly ac-
cepted criteria of need, efficiently available at the central level, and second (and
perhaps more important), because as these institutional arrangements limit local
autonomy, they tend to alter the local political dynamics that may, in the long term,
weaken the internalization of social problems within the local political debate. Be-
yond these debates, a transparent targeting system within a decentralized manage-
ment context (such as the SISBEN) has clear advantages compared with targeting
systems managed from the center, which tend to be highly prone to political and
electoral manipulation, as documented by new studies on Peru.
As we will discuss in greater detail in the Participation section, a key question is
whether or not it is possible to develop supplementary mechanisms that increase
the voice of socially excluded sectors and therefore alter the local political dynam-
ics without the need to overimpose bureaucratic patterns that in many cases are
relatively easy to avoid.
An issue of great importance is that the negative consequences of excluding
certain social groups from basic services are often felt more by the elites at the local
level than at the national level. Two typical examples are the exclusion of certain
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Poverty, Exclusion, and Access to SerAces: The Role of Institutional Reforns
groups from drinking water, sanitation, and garbage disposal systems that bring
about environmental consequences suffered even by the local rich, and the lack of
basic quality education that-in a context of greater competition-is "suffered" by
local businessmen in terms of workers' low productivity levels. The institutional
design underlying a decentralization program may strengthen these natural incen-
tives, mainly by avoiding generating opportunities for the subnational governments
to "export" these consequences or the cost of solving them to other jurisdictions or
to the national government. This changes the analytic line from one of choosing
targeting mechanisms to one based on making local and regional leaders feel the
costs of poverty.
Privatization
A second type of institutional reform consists of transferring responsibility for pro-
viding services from the state to the private sector. In many cases, privatization
implies the sale of state-owned assets (water and sanitation public utilities, tele-
phone, energy, and so on). In other cases, often not considered privatization, this
implies opening opportunities to the private sector to offer services previously
monopolized (formally or informally) by the state. Such is the case, for instance,
with reforms in the education sector in Chile (the introduction of vouchers) or in
the health sector in Colombia (the introduction of health services delivery organi-
zations).
This is an area of increasing interest levels, but relatively little empirical evi-
dence. I will mention a couple of examples only to show the possible importance of
the adopted institutional arrangements in terms of their impact on access to-and
quality and cost of-services to poor families.
An interesting case to consider is the privatization of infrastructure services
such as drinking water, electric energy, gas, and so forth. Microeconomic theory
suggests that the impact on the poor depends to a large extent on the regulatory
system established. On the one hand, since in most cases we face natural monopo-
lies, the pricing policy is critical in determining the distribution between service
providers and users (particularly low-income users)of gains in productivity caused
by privatization. On the other hand, adoption of "mandatory services" or "univer-
sal service obligations" systems that are efficient and transparent is critical to en-
sure that low-income groups or groups living in isolated areas benefit from the
expanded coverage and improvements in the quality of services resulting from pri-
vate-sector management.
The empirical evidence that I have in mind comes from Argentina, where some
recent studies provide us with interesting results.3 The potential gains to users of a
pricing system that ensures the transfer of cost reductions to users are extremely
3 See Omar Chisari, Antonio Estache, and Carlos Romero, "Winners and Losers from Utility
Privatization in Argentina," Policy Research Working Paper No. 1824, The World Bank; and Omar
Chisari and Antonio Estache, "The Needs of the Poor in Infrastructure Privatization: The Role of
Universal Service Obligations. The Case of Argentina," prepared for the seminar on the subject organized
by the World Bank's Economic Development Institute, Washington, D.C., Novemnber 10-11, 1997.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
high for all economic strata. However, such gains have not occurred in a general-
ized manner. The redistributive impact has been less progressive than that result-
ing from a more effective regulatory system. From the perspective of coverage
expansion, the evidence suggests that even though adopting a mandatory service
scheme in which private operators are required to guarantee connection to all inter-
ested users (who pay the service connection fees and normal rates) has shown posi-
tive results, certain low-income groups have remained outside the system. The
latter's exclusion can be partially reversed with changes in the regulatory structure
(for instance, extending the terms to recover the investment costs or through cer-
tain cross-subsidies).
It is not my intention to provide details of an effective regulatory system (which,
by the way, is beyond my area of expertise) but simply to emphasize, on the one
hand, the importance of thinking about the institutional design of a privatization
scheme from the perspective of inclusion and poverty reduction, and, on the other,
of evaluating the lessons emerging from these experiments in institutional reform.
In the education sector, the "privatization" example I have in mind involves
promoting educational delivery in private schools, within a competitive framework,
through demand subsidies-the so-called vouchers. In this case, the state transfers
the responsibility for service provision to private operators while keeping to itself
the responsibility of offering basic financing. This scheme has been applied in Chile
for more than a decade and several evaluations are available.4 Once again, I will
refer to this case somewhat superficially in order to highlight the importance of the
institutional design adopted (and adapted to a certain extent since the restoration
of democracy).
From our viewpoint, the key question is whether the reforms promote improved
access to quality education and, therefore, contribute to improve the social mobility
of children from low-income families. The Chilean experience offers a series of les-
sons. For example, evidence exists that the capacity of family heads to exercise their
opportunity to choose varies, depending on the neighborhood where they live, their
income level, and their social status. The supply of services is, obviously, more lim-
ited in rural areas than in urban areas, but even in urban areas, transportation costs
and the differences in access to information (commonly obtained through contacts
and informal networks) are an important source of exclusion.
The experience in Chile is also indicative of how these problems can be dealt
with by changing the institutional design so as to generate compensatory mecha-
nisms that increase the capabilities and opportunities of the less fortunate. The in-
troduction during the 1990s of new curriculum standards (supplemented with a
more aggressive use of the information on school performance as an information
strategy for parents) and of targeted assistance programs to schools with higher
enrollments of low-income groups are examples of how the democratic authorities
sought to compensate for the inequalities in opportunity and capability disregarded
4 A very recent summary on the issue may be found in Martin Carnoy, 'National Voucher Plans in
Chile and Sweden: Did Privatization Reforms Make for Better Education?" 42 Comparative Education
Review 3: 309-337.
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Poverty, Exclusion, and Access to Services: The Role of Institutional Reforms
in the initial design. It is less clear, however, to what extent an effort was made to
generate additional incentives or other conditioning factors geared towards alter-
ing the behavior of private operators. More generally, the question remains if, in a
scheme where the vouchers are targeted exclusively toward the low-income sec-
tors, results would be better, from the distributive point of view. Again, this is not
the place to begin specific discussions on this type of reform. We can only take note
of how crucial-from the standpoint of fighting poverty and exclusion-the spe-
cific forms of reform implementation are. It is in those fine points that the differ-
ences in results are found.
Participation
The term "participation" is very general, encompassing different concepts. The point
that I want to emphasize is that one change observed in LAC is the different direc-
tion taken to grant a more active role in the delivery process to users of the ser-
vices.. This ranges from consultations about priorities and user satisfaction surveys,
through delegation of only certain aspects of service management, to adoption of
management modalities in which the users are responsible for the entire operation.
This process is often referred to as "demand-orientation," understood as institu-
tional arrangements where state agencies offer options, objective information, and
funds to support community initiatives. Conversely, beneficiaries are required to
show their interest by contributing resources and/or labor.
The movement towards participatory programs is very strong in the region, at
least at the rhetorical level. Our generic question, however, is still valid: What is the
institutional design (that is, the rules of the game, the assignment of responsibili-
ties, the necessary conditions for the development of authorities and capabilities,
and the accountability mechanisms) that makes these participatory schemes effec-
tive mechanisms to fight poverty and exclusion on a sustainable basis?
While preparing these notes, I had the opportunity to review recent papers on
experiences related to participatory management and demand-orientation in the
education sector (such as the EDUCO program in El Salvador), in the drinking
water and sanitation sector, and in social investment funds, that offer some very
valuable responses to our previous question. In fact, the responses do not seem to
vary among services and are similar to those emerging from work in other areas
such as low-income housing in urban areas.5
Clearly, designing demand-driven schemes is not easy and, in fact, many pro-
grams that identified themselves as such are not (and many that are, show much
variation in different localities and regions). The basic conclusion is that the effec-
tiveness of these programs as mechanisms for service delivery to the poor and/or
excluded groups depends to a large extent on their institutional designs favoring
the beneficiaries themselves, and not intermediaries or representatives who express
their demands.
I See, for instance, "Encuentros: Senrunario sobre alianzas entre estado y ONGs para la reducci6n
de la pobreza," World Bank Economnic Development Institute, Washington, D.C., October 21-25,1996.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
What has been observed in many programs and initiatives supposedly partici-
patory (or directed toward the demand) is that the institutional arrangements that
are adopted restrict the capacity of the poor communities to fully benefit from
them. Two simple examples may serve to illustrate this. A recent study on water
supply programs in rural areas6 showed that even though the communities took
educated decisions based on the participatory program in question, since the con-
struction of the systems continued to be the responsibility of a "nonreformed"
state agency, they were unable to ensure that the works were carried out according
to plan. Similarly, an evaluation of the social investment fund in a Central Ameri-
can country showed that the private-sector contractors ended up controlling the
use of the funds far beyond the participatory planning process engaged in by the
poor communities.7
Three conclusions emerge: (1) demand-orientation must take place consistently
in all the stages of the provision process (financing, production, delivery, and so
forth), or the "weaker" link of the chain ends up dominating the rest; (2) participa-
tion as the approach for the provision of services to traditionally excluded groups is
information-intensive. In this sense, we find ourselves facing demands that are not
too different from those we identified in the case of private management schemes;
and (3) to be effective, the articulation of the demand must be accompanied by
contributions (in cash or in kind) from the beneficiaries, which indicates-given
our focus on low-income groups, as in the case of privatization of services-how
crucial it is to have a well-designed subsidy policy8
At the same time, it is valid to emphasize that community participation as an
alternative management strategy of a service requires a transfer of power typically
resisted by many social actors (by the state itself and, in the specific case of educa-
tion, by the unions). Thus, even in radical experiments, such as the participatory
budget in the city of Porto Alegre, it has not been easy to extend to recurrent expen-
ditures (which constitute the heart of the basic services delivery process) the strong
role that the citizenry-especially the poor neighborhoods-takes in assigning in-
vestment expenditures.
In addition to the assignment of responsibilities and the loss of control by the
most traditional actors are key factors, there is another important aspect to the in-
stitutional design of participatory programs: the management capability of poor
communities. We all have heard, many times, the condescending view-based on
the supposedly low capability of the poor-that rejects participation as an alterna-
tive. I will not waste time discussing this notion, on which we have enough con-
trary evidence. The question is, however, to what extent does the institutional design
favor the creation of new capabilities among the poor? An implied need exists to
6 See Harvey A. Garn, Travis Katz, and Jennifer Sara, "Lessons from Large-scale Rural Water and
Sanitation Projects: Transition and Innovation," paper presented to the Technical Consultation on
Decentralization, FAO, Rome, December 16-18,1997.
7 See Anthony G. Bigio (ed.), "Social Funds and Reaching the Poor: Experiences and Future
Directions," World Bank Economic Development Institute, 1998, p. 174.
s An example is whether or not to subsidize only capital costs, or operational and maintenance
costs as well.
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Poverty, Exclusion, and Access to Services: The Role of Institutional Reforms
design programs that take into account the time and the resources necessary to
strengthen the capability of the excluded groups' community organizations. Also
by implication, there seems to be an acknowledgment that, given the need to have
capable organizations, the level at which these participatory instances may occur is
essentially local. This emphasizes the link between participatory approaches and
decentralization.
Finally, it is worth considering that the participation of beneficiaries in the
management of basic services should not have to follow such radical examples as
the ones that I have mentioned so far. Today there is much talk about client-ori-
ented management- understood as the adoption by state entities of manage-
ment and administration styles that seek to respond to the needs of the beneficiaries
without transferring the responsibility (totally or partially) for the delivery to
individuals or nonstate entities. The question is, if a public enterprise, a health
service, or an educational system wants to move forward in this direction, what
are the conditioning factors and steps necessary to ensure that the poor and the
excluded will be clients with as much voice and vote as the rest? Are opinion
polls valid? When we think "results indicators" and "management by results,"
how do we ensure that the weight given to the excluded is sufficiently high, with-
out resorting to partemalistic formulas? As in the other issues discussed here, the
list of questions is, at least at the moment, substantially longer than the list of
answers.
Public-Private Partnerships
Up to now we have discussed institutional reforms pushed by the state that in one
way or another have altered the rules of the game for providing services, transfer-
ring responsibilities within the state sphere or to the private and community spheres.
However, some of the institutional innovations taking place in the region do not fall
neatly within these categories. I am thinking of the emergence of schemes in which
service provision is made through mixed public-private management modalities
that, in a recent report,9 we have labeled "partnerships." As I mentioned in the
introduction, the partnerships-as a new institutional modality-question up to a
point the current paradigms of public economics that tend to consider service pro-
vision on the basis of dichotomies among the state, the market, and self-manage-
ment. For this reason I would like to conclude these notes with a quick discussion of
the role of public-private partnerships as a mechanism for service provision, and
their impact on poverty and exclusion.
Perhaps it is worth beginning with an illustration; the Escuela Nueva program
in Colombia is a good example. Basically, this is a rural, multigrade education
program in the coffee-growing region of Colombia jointly implemented by the state
(the Ministry of Education and the regional and municipal authorities), the pri-
9 See Ariel Fiszbein and Pamela Lowden, "Working Together for a Change: Govermnent, Business,
and Civic Partnerships for Poverty Reduction in LAC," World Bank Economnic Development Institute,
Washington, D.C., 1999.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
vate sector (essentially the organization grouping the coffee growers in the area),
organizations from civil society, and, of course, the community itself. All these
stakeholders provide financing, contributions in kind, technical assistance, and
participatory management. In fact, the partnership nature is so ingrained in all the
stakeholders that it is difficult to say whether this is a state, coffee-growers', or
community program. The quantitative and qualitative impact is striking and well
documented. Although at a lower scale, documented examples of this type of part-
nerships exist not only in the education sector (even though this seems to be a
sector where partnerships are more abundant) but also in the health services, nu-
trition, water and sanitation, housing, microcredit, employment reinsertion, and
other sectors.
The partnerships' common denominator (and their most attractive aspect) is
that, in transcending the traditional schemes of separation between what is state-
controlled and what is nongovernmental (including the community, philanthropic,
academic, and business sectors), they achieve quantitative and qualitative results
that exceed the sum of the parts. This is due to a combination of factors. First, in a
context in which certain inputs (for example, technical knowledge) are scarce and
hard to obtain through the market, a partnership constitutes the only way to obtain
them; therefore, it allows a significant increase in output. Likewise, in allowing a
specialization in the management of a service among the members of the partner-
ship based on comparative advantages, the partnership encourages improvements
in productivity. Second, in promoting the systematic interaction between individu-
als and various organizations, the partnership tends to generate trust and social
links among them. This, together with the strengthening of the individual organi-
zational and management capabilities of the members of a partnership that results
from such interactions, constitutes a very powerful accumulation of social capital.
The evidence suggests that such social capital not only makes a direct contribution
in the improvement of the quality of the service provided, but also contributes indi-
rectly by generating the conditions for the sustainability of such partnerships, as
well as the development of new partnerships (in certain cases applied to other ser-
vices) at a lower cost.
At the macro level, the necessary institutional reforms to promote the develop-
ment of this type of partnership leads us once again to decentralization, privatization,
and participation schemes. Essentially, although the development of partnerships-
at least for the time being-basically depends on the initiative of state and nongov-
ernmental stakeholders at the "micro" level, reforms at the "macro" level are the
ones generating the favorable conditions for the partnerships. Decentralization (the
transfer of power to the local level, where the public-private interaction is most
successful), privatization, and participation are ways of making the state more open
to new stakeholders and therefore constitute the minimum conditions necessary to
develop partnerships. Still debatable is whether or not partnership development
requires additional changes to the formal rules of the game. An example is the adop-
tion of legal frameworks that acknowledge the dynamic nature of the partnerships
and that allow the efficient integration of the state's administrative procedures with
the flexibility needed in a scheme in which the state is just one more player. At the
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Poverty, Exclusion, and Access to Services: The Role of Institutional Reforrns
same time, the importance of informal factors (the generation of a culture of social
accountability, for example) should not be minimized; they underscore the signifi-
cance, of actions that tend to improve the flow of information and contact between
the state, civil society, and business-or the existence of intermediaries that play
such roles.
Finally, our knowledge is relatively limited on how to design the microlevel
partnerships in order to improve their impact on poor and/or excluded groups'
access to basic services.. We are aware of the partnerships' potential, and that the
beneficiaries themselves must become active members in the partnership, but we
still do not have clear and simple answers about how we can organize a partner-
ship in order to achieve those results. It may well be that we can only achieve this
by focusing our attention on specific services (for example, education, health, and
drinking water).
A Work Plan
In the introduction to these notes, I posed three questions related to the impact of
institutional reforms, their sustainability, and their indirect effect on the relations
among the social stakeholders. However, since my comments have responded pri-
marily to the first question, I do not want to close without speculating about the
other two.
The question of whether these institutional reforms (and their impacts) are sus-
tainable leads us to think about the political economy of institutional change. Such
a vast variety of experiences exists in the LAC on decentralization, privatization,
and other reforms of a constitutional nature that my comments did not even try to
reflect it. The factors that led to the initiation of these change processes (as well as
those that stopped many of them) can tell us much about the long-term sustainability
of the impacts that we are observing today. My perception-not very scientific, by
the way-is that many of the changes in the rules of the game between the state, the
market, and the civil society are sufficiently profound to probably last. But at the
same time, I believe that the sustainability of these reforms depends on introducing
changes and adjustments to the specific institutional arrangements that seek to com-
pensate for the undesired effects on social inclusion.
An interesting aspect of the reforms we have discussed is that changing the
rules of the game in a certain dimension tends to change the way different groups
in society organize and conjoin with each other. For example, a rural education
program that transfers the authority to community groups tends to strengthen the
organizational capability of those communities and, therefore, to also change the
local political dynamics in other dimensions. This is, in part, the subject of another
session in the forum. However, it is worth emphasizing that, in designing institu-
tions that seek to improve the access of the poor to basic services, we must think not
only in terms of the direct impacts, but also in terms of the impact on the capability
of the different groups (social, political, regional) to participate in the political pro-
cesses in order to change the rules of the game.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
I hope that this quick, somewhat cursory review of some of the reforms taking
place in the institutions that provide services in LAC encourage us sufficiently to
continue debating the following premises:
*  Reversing the pattern of unequal access and exclusion of basic services preva-
lent in the region requires profound changes in the institutions that regulate
service provision. This requires changing the rules of the game of whoever is in
charge, their powers and available tools, and their incentives to serve the poor.
*  The question is not whether or not to decentralize or to privatize, but rather,
how to decentralize and privatize. In other words, what should concern us are
the specific institutional designs that create the conditions to improve access for
the poor to quality services.
* The previous point requires systematic efforts to learn from the empirical evi-
dence and from specific cases of institutional reform. The variety of innovations
and reforms taking place in the region offer a wealth of "natural experiments"
from which we can learn.
*  This learning process should be of a multidisciplinary and multisectoral nature
(that is, incorporating visions and perceptions from different groups and social
stakeholders) in order to contribute effectively and in a sustainable manner to
the necessary change process.
The return on this "investment", I believe, can be enormous.
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Latin American Labor Markets in the 1 990s
Barbara Stallings
Director, Economic Development Division, CEPAL
The first line of defense against poverty and inequality in Latin America is the labor
market. While government expenditures on social services and transfers can make
important marginal adjustments to the primary distribution of income, the pay-
ment of wages and salaries has a much more significant impact. Avery rough quan-
titative indicator of this relationship is the fact that some 40 percent of national
income in Latin America consists of wages and salaries, while government expen-
diture on social services and transfers amounts to only around 4 percent.' Thus, it
is crucial to understand how labor markets function and the distributional out-
comes they produce.
Given this assumption, this paper will first provide a brief overview of the new
context in which labor markets have been operating in the 1990s. Next it will look
at employment trends, with respect to both quantity and quality of jobs. In discuss-
ing the latter, the relationship between the formal and informal sectors will be in-
troduced. Next, the paper will review two "gaps" in the distribution of income:
skilled versus unskilled workers and urban versus rural workers. It will conclude
with some comments about impact of labor market performance on poverty and
inequality and some policy recommendations. The main basis for the discussion is
a project currently under way at the Economic Commission for Latin America and
the Caribbean (ECLAC) to evaluate the impact of the structural reforms of the last
10 tol5 years on prospects for growth, employment generation, and equity in 9
countries in the Latin American region.
Structural Reforms
The reforms of concern here are the so-called "first generation" reforms, designed
to open economies and increase the role of market forces. Shortcomings in the re-
sults of the first-generation reforms are now leading to calls for a "second genera-
tion" of institutional reforms (see Ariel Fiszbein's paper for this meeting). We will
return to this issue at the end of this discussion.
Because of these first-generation reforms and the accompanying macroeconomic
adjustments, labor markets have been functioning in a new context during the
1990s. The macroeconomic component reflects the new value that the region's gov-
I A very approximate calculation based on information in various numbers of ECLAC's Statistical
Yearbookfor Latin America and the Caribbean. Generally these figures exclude self-employed workers.
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Report on the Meeting of the latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
ernments have put on macroeconomic balances as a consequence of the hyperin-
flation and very large deficits during the years of the debt crisis. Bringing inflation
rates down to the single-digit level became a priority in many countries; to accom-
plish this, budget deficits were slashed. A key point for the labor markets discus-
sion is that budget equilibrium was frequently attained by cutting expenditures
rather than raising taxes. Another instrument that has been used in the battle against
inflation is fixed or semifixed exchange rates, leading to real appreciation of local
currencies, which has had the negative side effect of enlarging balance-of-pay-
ments deficits and leading to stop-go growth cycles based on the availability of
external financing.
The structural reforms can be grouped in two main categories. First were changes
designed to increase the integration of the region into the world economy. These
included liberalization of imports (lowering tariffs and eliminating nontariff barri-
ers) and opening the capital account of the balance of payments (liberalizing rules
for foreign direct investment, and eliminating barriers to the entry and exit of short-
term capital).
The other set of reforms aimed to lower the role of the government in the economy
and to give greater emphasis to market forces. A crucial aspect of this process was
the reform of the domestic financial sector, whereby interest rates and credit deci-
sions were made dependent on market forces rather than government direction. A
second such reform lowered the maximum marginal rate of taxes on corporate and
personal income taxes and partially replaced them with a value-added tax. Third,
many state firms were sold to private entrepreneurs, either domestic or foreign.2
Although labor flexibility has sometimes been discussed as part of the first-
generation reform package, less has been done in this area than in some others
mentioned above.3 (An important exception is Chile, which began its reform pro-
cess much earlier than other countries; several other countries have recently adopted
labor reform packages.) Nonetheless, despite the absence of comprehensive legis-
lation, important changes have occurred at the firm level, taking advantage of ex-
isting exceptions in the old laws. For example, temporary contracts are now more
frequent, as is job flexibility within the firm. The rationale for labor reforms has
been that employers are reluctant to hire workers because of labor immobility and
high taxes; limiting these would thus increase the number of jobs created. Until
now, little indicates that this has happened, although the low unemployment rate
in Chile might be seen as evidence in favor of the argument.
Employment Trends
One of the principal problems in the labor markets in the 1990s has been an insuffi-
cient job generation. This is reflected in the increase in unemployment in most Latin
2 Quantitative indicators of these reforms can be found in Samuel Morley, "Measuring Structural
Reform in Latin America," ECALC Working Paper on Economic Reforrns, 1998.
I IDB, Economic and Social Progress Report, 1996 and 1997.
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Latin American Labor Markets in the 1990s
American countries in recent years. In 1996, the rate of open urban unemployment
reached an average of 7.7 percent, compared to 5.9 percent in 1990. This masks the
double-digit levels in a number of countries: Argentina, Colombia, Uruguay, Ven-
ezuela, and several Central American and Caribbean nations. (Unemployment rates
generally fell slightly in 1997, but are expected to rise again this year.) It is impor-
tant to note that this increase in unemployment occurred despite the fact that the
total work force is increasing at a slower rate in the 1990s than in the 1980s.4
Another way of describing the same problem is to look at the relationship be-
tween the growth rate of gross domestic product (GDP) and growth of employ-
ment. In the 1980s, a 1 percent GDP growth resulted in a 2.6 percent increase in
employment. In the 1990s, by contrast, 1 percent GDP growth produced only a 0.6
percent rise in employment. As a result, the economies must grow by about 4 per-
cent per year in the 1990s for unemployment not to increase; in the 1980s the figure
was only 1 percent.
Why have these differences occurred? One reason is that, as governments have
restructured to increase their efficiency and lower their costs, they have reduced
the size of their work force. Thus, public-sector employment has fallen as a share of
the total during the 1990s. In a similar way, newly privatized firms have fired workers
who were considered to be "redundant." Contrary to (perhaps overly optimistic)
assumptions, these newly unemployed workers have generally not been able to
find jobs in other sectors. In part, their skills are not appropriate, and in part, the
fastest-growing firms are the large, technologically sophisticated ones that are capi-
tal-, not labor-intensive. The smaller firms, which employ the largest number of
workers, have been growing much more slowly.
This brings us to the issue of job quality and the relationship between the for-
mal and informal sectors. The informal sector is defined in several different ways.
The spirit of the concept is that, since informal firms are not legally registered, their
workers lack access to various kinds of benefits. They also tend to be poorly remu-
nerated, have low productivity, and endure sometimes dangerous working condi-
tions. In other words, job quality is poor. In practice, this concept is difficult to
measure, so economists have tended to use a proxy that equates the informal sector
with work in small firms (5-10 workers, depending on the country) and the self-
employed (subtracting out professionals); sometimes domestic workers are also
included in the definition.
During the 1990s, the informal sector has grown much faster than its formal-
sector counterpart. According to some recent data, informal employment as a share
of the total rose from 51.6 percent in 1990 to 57.4 percent in 1996. An average of 80
out of 100 jobs created in the 1990s were in the informal sector.' The idea of work in
small firms per se is not a problem; the problems derive from the low quality of
employment: long hours, low pay, and few benefits.
4 An overview of employment trends can be found in Jurgen Weller, "La evoluci6n del empleo en
America Latina en los afios noventa," ECLAC Working Paper on Economic Reforms, 1998.
S Eduardo Lora and Gustavo Marquez, "The Employment Problems in Latin America: Perceptions
and Stylized Facts?" Paper presented at Annual Meeting of IDB, March 1998.
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
Wages and Wage "Gaps"
Real wages-for those who have jobs-have generally increased in Latin America
during the 1990s. Important exceptions are Argentina (where real wages have been
flat during the decade) and Mexico (where they increased rapidly until the "tequila
crisis" but have not yet recovered); in Venezuela, real wages have fallen throughout
the decade. In some cases, especially the three just mentioned plus Peru, median
wages are still below their 1980 level.6
Within this somewhat mixed picture for overall wage patterns, two "gaps" il-
lustrate particular problems in Latin American labor markets. One is the difference
between incomes of skilled and unskilled workers. Incomes of skilled workers have
generally been growing faster than those of the unskilled, or the gap has remained
constant. In the nine countries of the ECLAC project, the skill differential has in-
creased in four (Argentina, Colombia, Mexico, and Peru), remained the same in
two (Brazil and Costa Rica), and fallen in only three (Bolivia, Chile, and Jarnaica).
The skill differential has not been reduced in more countries for two basic rea-
sons. First are longstanding problems in the education systems in Latin America,
which tend to produce a small group of highly qualified people at the same time
that the large majority does not finish secondary school. This situation, which con-
trasts with that in Asia and Eastern Europe, makes it possible for scarce, skilled
workers to obtain a wage premium. In addition, the economic reforms of the 1980s
and 1990s have almost universally led to a rise in the capital-labor ratio. That is,
capital has become cheaper with respect. to labor (as tariff barriers have fallen and
the value of local currencies has appreciated), and capital intensity has risen. With
greater use of machinery comes the need for more skilled workers and fewer un-
skilled.
A second "gap" produced or exacerbated by the labor markets is that between
urban and rural incomes. For lack of adequate wage data, we will rely here on
poverty trends. During the 1980s, the urban sector bore the brunt of rising poverty;
over 70 percent of the increase in poverty during that decade was urban. Since
1990, the situation appears to have been reversed in most countries, in that poverty
reduction has been primarily in the urban sector. In seven of our nine countries,
there has been a smaller reduction in rural than urban poverty. In some cases, such
as Mexico and Jamaica, the differences are striking.
The exceptions to this trend are Chile, Costa Rica, and Peru. In Peru, rural pov-
erty fell between 1985 and 1994, but at the same time a large flow of rural to urban
migration took place, so that rural poverty seems to have been transferred to the
urban sector.
There could be two, possibly overlapping, explanations for why the rural sector
seems to be lagging behind the urban in poverty reduction. In the first place, it
could be that the cycles in economic activity primarily affect the modern, urban
sector of the economy. If that were the case, recession in the 1980s would have been
expected to increase urban poverty. Likewise, the recovery in the 1990s would sim-
6 ECLAC, Economic Survey of Latin America and the Caribbean, 1997-98.
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Latin American Labor Markets in the 1990s
ply reverse the process, with the rural sector being somewhat insulated from these
cyclical changes.
In addition, macroeconomic variables may have been at work as well. To the
extent that rural economies produce traded goods, their welfare will be affected by
the real exchange rate. Real depreciation of local currencies (typical of the 1980s)
will boost the fortunes of the rural traded goods sector, while real appreciation
(typical of the 1990s) will do the opposite.
Conclusions
The principal problem of labor markets in Latin Ainerica at the present time is that
not enough jobs are being produced. For a given rate of growth, fewer jobs are
being produced than in earlier decades, mainly because growth is concentrated in a
small group of large, capital-intensive firms. Those jobs that are being created tend
to be in the informal sector, with the associated lack of benefits and poor working
conditions.
With respect to wages, the picture is slightly more mixed. Real wages have gen-
erally been rising in the 1990s, but the increases have been unequally distributed.
Skilled workers have been gaining at the expense of the unskilled, and urban work-
ers have been gaining at the expenses of their rural counterparts. In some cases, this
has increased rural-urban migration.
The impact of these trends on poverty and inequality, however, is not as direct
or obvious as might be expected. We know more about the causes and remedies for
poverty than we do about inequality. Poverty has generally been declining in the
1990s, because of the increase in the growth rate and because of the fall in inflation
(especially the elimination of hyperinflation), but it remains unacceptably high.
Inequality is much more difficult to analyze. Despite the widely held view that
inequality has increased in the 1990s, this is only partially true. For example, in-
equality among income recipients (excluding the unemployed) appears to have
declined in many countries. Even the increased skill differential has not been di-
rectly reflected in increased inequality of total income because other things have
been happening at the same time.
The most important countertrend is that, in a number of countries, the profit
share has been falling as a result of increased international competition or other
factors. If that happens, the overall distribution of income may improve despite an
increased skill differential. Also, the process of job creation and destruction may be
more positive than we think. Some evidence in the Chilean case, for instance, sug-
gests that poor-quality jobs are being destroyed and better-quality jobs are being
created. In general, we need much more information and analysis on the causes of
inequality.
Despite declines in poverty and some much more modest gains with respect to
inequality, Latin America clearly has a long way to go in these areas. Labor markets
must play a key role in improving the quality of life for citizens of the region. If this
is to happen, some important policy steps need to be taken to strengthen labor
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Report on the Meeting of the Latin American and Caribbean Forum on Poverty, Inequality, and Vulnerability
markets. These involve second-generation institutional changes. Especially impor-
tant are (1) improving access to, and quality of, secondary education; (2) increasing
the resources dedicated to worker training; (3) providing special assistance to small
and medium-sized firms to increase their access to credit and technology; and (4)
simplifying the legal procedures to bring more firms into the formal sector so as to
extend benefits to their workers. Only with better-functioning labor markets can
real gains be made with respect to poverty and inequality.
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