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Timing Market Reform: The Politics of Social State Reform in Uruguay (I)

Fernando Filgueira & Carlos Filgueira
It is naive to believe that increasingly unequal social structures will solve this tendency by providing remedial public policies to those with "no exit" options and increasing the "exit" options to those with the means to do so. The most devastating process at work in Latin America is that elites and blessed middle sectors can opt out of public goodsIntroduction

Only two countries in Latin America have processed a significant transformation of the state as a provider and guarantee of forms of social citizenship under a full functioning democracy; Costa Rica and Uruguay. Mexico, Argentina and Perú for different reasons have undermined democratic mechanisms (or never had them to start with) and checks and balances, in order to advance structural reform. Chile is a well known success of the Pinochet regime. Brasil, is still caught in the paralyses of social sector reform and further structural economic reform.

The 80´s economic crises and structural reform has had dear costs and left important scars on social development and social integration, which renewed growth has not yet undone.

Countries paid these costs in different ways. How many, who, for how long and how much of a social cost was placed upon these societies, I argue, depended on what political game in town administered this process of creative destruction led by the market. Institutionalized democracies apparently had to pay the costs of tardiness that these systems of decision-making bring with them.

In the papers there were good reformers and laggards, and policy change in the direction suggested by orthodox advice became the basic criteria to grade countries and chart their future.

Uruguay showed according to some a worrisome tendency to block, veto, slowdown and negotiate reform. In the numbers, though, today the country shows that the transition from one model of development to the other has so far been less cruel and more fair with its people than in most of the so called good reformers. A major reason that accounts for this result is the timing and content that social sector reform presented. Rather than moving according to the advice of economists and multilateral lending agencies (MLA's), Uruguay had to deal with one hundred years of a social state, the social structure it contributed to shape and a dense democratic political system.

This slowed down reform on the one hand, and modified the prescribed contents of such reforms on the other.
This paper argues that limited options and deterring mechanisms for “exiting” the system of public goods, the degree of “loyalty” present in the population regarding those systems and the activation of “voice” that dominated the process of reform achieved two basic outcomes. First it made highly unfeasible a reform of the social state guided by a purely market oriented paradigm. Secondly it placed a clear stop in the process of reform by-default and decline in services and benefits quality that had taken place between 1960 and 1985. The final outcome, has so far been a reform that has limited and in some cases reversed the decline in quality without sacrificing coverage, and a statist and redistributional emphasis on the new and old instruments of social protection despite the new market oriented wisdom in social policy.


Latin American people are today as never before free to "exit" those organizations, enterprises or even policies they do not like. Monopolies have been broken, tariffs have disappeared and private alternatives competing with public goods are available. Competition blooms everywhere. If that was not enough, our people can also today produce and make "voice" count as never before, for never before was democracy so predominant in the region. Or so the story is told.

Poverty and inequality on the rise, anomic violence increasingly close to our safe existence, political systems with frail legitimacy and a sense of having been cheated that many surveys across the region transpire
(see table 8), tell a different story. What went wrong?

Maybe we should start with the simple fact that most people do not have the means to "exit" a bad organization or provider for a better one. You can "exit" if you can pay for a different product or get another job. A second element might simply be the quality of the "voice" that can be produced on the one hand and the responsiveness and accountability of those in charge of a given organization on the other. Thus both "exit" and "voice" fail to play the role of corrective mechanism when the state or other organizations face decline in quality and efficiency.

These problems are particularly acute when we are referring to public goods. Increasingly the "exit" option is available to the most quality conscious and potentially active and persuasive customers
(in other words the most privileged citizens), and "voice" is less and less heard or paid attention when it comes from those with "no exit" options. The end result is that neither the "exit" mechanism nor the "voice" option operate as a corrective device to improve an organizational output, in this case the public goods provided by the state.

It is naive to believe that increasingly unequal social structures will solve this tendency by providing remedial public policies to those with "no exit" options and increasing the "exit" options to those with the means to do so. The most devastating process at work in Latin America is that elites and blessed middle sectors can opt out of public goods. That quality that public goods once had, -that you could never completely "exit" them- is becoming less and less evident, and full fledged private alternatives appear as plausible options.

Uruguay, we claim, has been an exception. Although increasingly under attack, public goods remain public, thereby, increasing the density, intensity, quality and frequency of voice as a corrective mechanism. This was not always the case. Uruguay during the sixties had become a country that offered or allowed for few exit options
(many times by law) from the state and its regulation but "voice" had become ineffectual. The most radical form of "exit" expanded: exit from the country. Today Uruguay has combined "exit" and "voice" options in a more balanced way. A hard and lengthy process of economic structural reform and of state reform is responsible for this new balance.

Most international agencies have viewed Uruguay' structural reforms as worringsomelly timid. Recently, judgments have become less harsh and more laudatory of Uruguay's record of reform.

To a large extent this is due to the fact that Uruguay has undertaken, though in a gradual way, many of the reforms that are commonly prescribed today. Today, Uruguay has an export oriented economy with lower tariff barriers and with a more disciplined fiscal policy. It has also engaged in domestic market reforms, especially in the financial market. Furthermore it has finally passed laws that will drastically reform the social security system and public education. Finally many state monopolies have disappeared, and other state enterprises make extensive use of private capital as partners and of enterprises as providers of intermediate goods or as service providers.

Yet, it is also true, that these reforms have been carried out long after they were hailed as urgent by the international community and only after important variations in contents were introduced. It is also true that many reforms have been rolled back or directly blocked in its most important components, limiting its impact and transformational range. In what concerns us -social state change, reforms have been particularly deviant from the proposed models. In effect, the social state has reformed itself and is still in the process of doing so.

But it has done so, keeping two central characteristics that are precisely the ones that the new social policy paradigm proposes to eradicate. The new model that seems to take shape in Uruguay's social state is one that remains strongly statist and oriented towards redistributional and social integration goals, instead of moving towards a more public-private mix geared at problems of human capital investment and extreme poverty remedial policies.

Despite this rebellious attitude, Uruguay draws today more praise than critiques. Analysts and agencies loyal to market oriented reform are content to point out the obedient side of the reformer, and claim that therein lies the key to success, neglecting the deviations from the standard menu of reforms. For that is the real point. In the last twelve years years Uruguay's record of reform might be mixed, but in a regional comparison, its record on social and economic development is not: it is unequivocally good.

In regard to the social outcomes of the last fifteen years, we believe that it is precisely the fact that Uruguay was to a large extent a moderate rebel, especially regarding social state reform, what accounts for its success. The timing and content of social state reform allowed the country to face some of the harshest costs of crises and structural adjustment and to adapt to the new context without giving up some of the redistributional and integrative instruments the state had.

The historical legacies of a robust social state, the way in which international constraints and international agencies advice was selectively filtrated, and a domestic logic in which "loyalty" effectively regulated the intensity and quality of exit and voice as corrective mechanisms are the ingredients put together in this paper to understand the reform of the social state in the last fifteen years.

1. Bleak prospects, wrong theories.

i. Three false apocalyptic predictions.

Not so long ago, prophets and analysts charted the future of Uruguay's social health and developmental chances. Their incapacity to predict what was going to happen is illuminating and provides us with a starting point and some keys to understand the current state of affairs.

While two of these predictions are common knowledge, the third false prediction belongs regrettably, to one of the authors of this paper , and dates to a manuscript that was finished around 1992, and finally published in 1995 (Filgueira F., 1995).
The first prediction pointed out Uruguay's incapacity to push forward structural reform and adapt to a world in which markets, risks and trade opportunities are the key to developmental success. Uruguay es el país del empate -which loosely and conceptually translated means that Uruguay will give up winning if that minimizes the risks of loosing, is a popular expression that this perspective holds to be true and claims is responsible for Uruguay's ills.

In this view, Uruguay's doom would come about because of its incapacity to change and assume risks. Especially regarding economic transformation -and the concomitant need to change the social state- Uruguay is criticized for doing too little, too slow, and as it would find out one day, too late. This incapacity for change would lead to economic stagnation and eventually to a critical decrease in people's welfare.

A radically different prediction, comes not from the liberal reformers, but from those positioned on the left. Uruguay, in this view, has been led to the neoliberal model without considering the social costs of such a model. A doctrine that looks only at macroeconomic stability, without concerning itself with the welfare of its people would lead to decline in welfare and a marked increase in inequality.

An additional aspect of this critique pointed out that the Uruguayan neoliberal project is of a peculiar kind, betting on a country of services, speculation and financial institutions, forgetting the productive country, and thus delivering a big blow to employment and social development.

According to this perspective, Uruguay would end up as many countries that had performed the neoliberal reforms without concern for its people. Numbers that might look promising in the economic front, would not have a positive effect in social indicators. Rather we would witness a process of social decay with increasing inequality and the growth of marginalized sectors.

As with many of these experiences the end result would be an exclusionary society, anomic violence, instability and the increasing loss of legitimacy of the political system. In a worst case scenario this could very well lead, to renewed economic instability, undoing whatever good the previous reforms had accomplished at the economic level.

The last prediction proposed a mixed scenario. On the one hand it was argued that the political context had shown and would continue to show and important capacity to block major reforms. This capacity to block reforms included not just the liberalization of the economy, but very especially the social state
(social security, education, health, housing and labor market regulation). Instead, a logic of reform by-default would follow. One in which services and benefits would continue to deteriorate, the overall pattern of stratification would grow more unequal, and people, especially the middle and upper middle class would vote with its feet (or their money) exiting the public system and moving to private alternatives.

This in turn would erode the basis of support of such programs leading to further lack of financial resources, thus starting the vicious cycle again. In the long run, Uruguay, in a rather perverse way would adapt to continental standards of reform and its social reality would look more like the rest of its Latin-American peers.

None of these predictions proved true. Uruguay's economic and social health has not collapsed, on the contrary it has improved. Regarding the final prediction, it can be argued that some of what was advanced has happened. In effect, some sectors services have deteriorated or at least have not improved
(i.e. health, arguably education), people have sought alternatives in the private sphere though not to the extent predicted and without completely exiting the public system. As a matter of fact, an important safety net still exists and reaches the middle classes which have shown to have a stake in and defend the system.

The other point, which did not prove true, was the notion of a continued block on reforms by the political system. Social Security and Education are going through one of the major transformation of the century. More flexible and targeted systems have had a more humble development, but a certain development nonetheless.

Finally what many analysts saw as vetoes in the process of reform, should, with the advantage of hindsight, be redefined as steps that contributed critical ingredients to the final outcomes of reform. Ingredients that made of such reforms a quite different model than the one being advocated by market oriented reformers. Thus neither the orthodox market oriented critique, nor the neodependency argument seem to fare well with Uruguay's social outcomes. Furthermore, the hypothesis of a blocked system and a perverse reform by default also lacks empirical support.

ii. A good case with a bad attitude

Uruguayan pride was fed recently by the publication and further communication in the press of the latest reports on social development published by the Economic Commission for Latin America. Enrique Iglesias added to that pride by pointing out that Uruguay is the best example of a balanced strategy of structural reform and social concern for its population.

Politicians, as could and should be expected, were eager to point out this data, and of course, assume responsibility for such rosy state of affairs. While the Colorado administration was the first to call our attention to what CEPAL said about Uruguayan social development, a nationalist newspaper rightly pointed out that the period for which the data was gathered covered mostly the Lacalle administration, not the Sanguinneti administrations. The left, through its leaders and newspapers, claimed that it was what the people and their coalition did as opposition that explains the social outcome.

Had the colorados or blancos been left free to process reform, a different picture would be in place. Furthermore leftist opposition suggested that while numbers tell one story, people and their fears, concerns and frustration tell another.
What is this bounty that so many political groups and fractions want to grab for themselves?

Uruguay, between 1985 and 1994 -if we put together the different reports on social development- has been able to show a steady, and in regional terms, one could term spectacular improvement in almost all the traditional indicators regarding social development and welfare of its population. Poverty, according to CEPAL data, has been cut in more than half, infant mortality already low, has been further diminished, unsatisfied basic need (measures of housing quality and adequacy, family income generating capacity, and educational indicators) has also been significantly lowered.

Inequality, on the rise regionally and world wide, has slightly decreased and remained low thereafter, both measured through the gini coefficient or in income quintiles participation, placing the country as a low inequality country even in comparison with some OECD countries. Furthermore, all this was achieved without sacrificing economic growth but also without spectacular rates of economic growth, as in the case of Chile.


Evolution of Selected Social Indicators for Uruguay

   Urban Poverty  Urban Indigence Basic Needs Montevideo  Gini Coefficient  Basic Needs Urban Interior  % National Income, of urban poorest 40%
 1984 n/d n/d n/d n/d 11.1 17.5
 1986 14  3 0.39 17.3 n/d n/d
 1990 12  2 0.35 20.1 8.4 (a) 15.5 (a)
 1992  8  1 0.30 (b) 21.9 n/d n/d
 1994  6  1 0.30 (b) 21.6 6.0 13.1
Source: CEPAL, 1994, 1996; FAS-INE, 1995. (a) data for 1989. (b) Recent analyses by Vigorito (1998) question these figures, and end up with a gini coefficient that has esentially remained unchanged for the period under consideration.

Do these numbers tell the whole story? Is the left wing opposition's claim reasonable? Partly so. First, we have to consider that the data stops short of monitoring social development after the first waves of the "tequila effect" were felt in the southern cone (especially Argentina and Uruguay).

Most analysts agree that the last year and a half, will show a deterioration in poverty and income related measures. Secondly while the recession seems to be over, the high level of unemployment, that it induced, does not seem to go away. A country that historically had between 6 and 9 points of open unemployment, hovers between 11 and 13 points today. Still even if this last years have not been positive in terms of social development, the overall performance is still remarkably good.
Other critiques point to the way poverty and other social welfare dimensions are measured.

Some analysts claim that the poverty measures are both dated and unreliable. New estimations of basic need and the income needed to reach it have increased poverty from 7 % -the data offered by CEPAL- to 13 or 14 % depending on minor technical details. Also, the tool for gathering information, it is said, is unreliable. In effect, la "encuesta continua de hogares" has three problems. One is long known and we believe not serious: income is over and under declared. The second problem is more serious, and is both and indicator of social problems and a probable cause of underestimation.

The survey, seems to have recently skipped a few -not more than a couple- neighborhoods that are not "safe", but that are supposed to be surveyed in the original sample. The final problem is that the basket of basic foodstuff is dated, and the actual one more expensive. In effect, when calculated by the new method by the Institute of National Statistics, in 1996, the percentage of households living below the poverty line increased to 13%
(from 6% in 1994). Of course part of that increase is not simply due to the method, but also to worsening social conditions.

In any case, while these measurement problems are real, they are no less real in most other countries. Thus, it can reasonably be said that the trends in terms of social development are in Latin America roughly comparable, and that the data shows in that sense, Uruguay, as a regional anomaly, even when compared with its southern cone peers.


Evolution of Poverty and Inequality for Selected Countries in Latin America

   Urban Poverty (%)  Urban Gini Coefficient
Uruguay 1981  11  0.39
  1994  6  0.30
Chile 1987  38  0.49
  1994  24  0.48
Argentina 1980  7 0.37
  1994 12  0.44
Mexico 1984  28  0.32
  1994  29  0.41
Costa Rica 1980  16  0.33
  1994  18  0.36
Colombia 1980  36  0.52
  1994  41  0.51
Source: CEPAL, 1997.

A different issue legitimately brought forward by critics, is to extract from this picture a self congratulatory idea of what the country looks like when we compare it with the image that such country has and wishes for itself and its people.

But, if we accept, that the country has shown improvement in social conditions, who or what is then responsible for it? This question admits no simple answer, and is in fact, a good part of what this paper will deal with. The final answer will probably satisfy few of the candidates, for social outcomes are more often than not the product of logics, legacies and resources that no agent or actor can control, and even of the unintended effects of these agents actions.

To tighten the scope, this paper concerns itself, with one of the immediate causes of social welfare: the social state, and the reform of such social state. We use the term social state instead of welfare state for reasons already pointed out in Filgueira, F

We use this term instead of social policy, for reasons that should be explained in more detail. Social policy conveys a technocratic sense of the state's role in redistributing goods and income. A social state, us we understand it, is a regime, in the sense proposed by Esping-Andersen, of which social policies constitute just one, of course rather important, dimension.

A second, also critical aspect, of the social state, is the regulation of rights and duties of individuals in the labor market, and its presence or absence in instances of collective bargaining and labor disputes. Furthermore, while social policies suggest the idea of technical packages, that can be chosen at will, a social state as a regime, is densely connected with and thus depends for its survival and transformation on the socio-political system. Finally, social policies have in the latest times become associated with the notion of investment in human capital and remedial actions when the individual or family fails in the market.

The Uruguayan social state goes well beyond these aims: it decommodifies, contributes to a pattern of stratification and constitutes a basic ingredient of labor and employment policy in the country.

From 1985 to our days, Uruguay has undertaken the completion under a democratic regime of a long and hard process of economic structural reform. Alongside this reform, the old tools of the Uruguayan social state had to change, adapt or resist the transformed economic environment. The timing and combination of the economic and social state reform in Uruguay, is, we claim, the key to understand why the country shows today the trend of social development summarized above.

The shape and form of these reforms and its relation with economic transformation depended on political structures, institutions and power, resources and interests of Uruguayan people combined with external pressures, both in the form of structural constraints and MLA`s advice, financing and influence.

iii. Legacies, Growth and Social Policies: the basis for social development.

That growth has been the major factor behind Uruguay's social development is certainly an argument that can be made, and that at first sight sounds rather convincing. While far from spectacular Uruguay's growth in the last two decades and a half cannot be put into question. Between 1972 and 1997 Uruguay has grown at an average yearly rate of 3.2% in terms of its GDP per cápita. Yet if we look more closely, growth alone seems to poor of an explanation to account for the variations across this period and in comparison to other countries. For example between 1974 and 1982 Uruguay grew at a rate above the average for the period, yet social indicators worsen in almost all cases, with the exception of infant mortality and life expectancy.

Poverty rises, inequality increases and wages continue a long dive. Furthermore if we compare growth and social development between Uruguay and other countries new problems arise. The level of economic growth in Chile, Brasil and Mexico is for most of the period above Uruguayan growth, yet social indicators do not reflect this fact.

In a recent panel in Uruguay, Hugo Fernandez-Faingold gave what probably is the best answer to Uruguay's social health with a telling example. In the University of Oxford the chief of gardening was asked how he managed to have such a perfect lawn. He answered that is was easy: all the even days the garden had to be mowed from north to south and the odd days from east to west... during six hundred years. The major reason why Uruguay's social health is good, is that for the last hundred years Uruguay has invested strongly in human capital, equality and social integration. This has allowed the country to accumulate a stock of human and social capital that constitutes a major safety net for periods of crises and transformation
(Filgueira, C. 1994). Also, one hundred years of investment in integration and human capital, solidified an institutional design and commitment that will not disappear overnight, simply because resources are scarcer.

That, and that alone maybe the simplest and more accurate answer to the question posed above. Yet it is also true that countries with that tradition have lost ground
(i.e. Argentina recently) and others without it were able to catch up (i.e. Costa Rica from the forties to the eighties). Furthermore it is also true that Uruguay's social health was deteriorating towards the end of the dictatorship, but strongly recovered with democratic restoration. While we agree that present day differences can partially be explained with reference to past investment, the sustainability of that investment and its adequacy to social needs today, has to be approached as a relevant question with other explanatory tools. Inertia is not enough of an explanation.
That is where a third factor comes into play. Policies and especially recent social sector behavior may constitute the key to understand, not simply Uruguay's above average social development in the region historically, but also Uruguay's recent social performance.

When a whole region is undergoing major transformation stubbornness has to be explained. Nay more, high levels of social expenditure were maintained in a fiscally constraining reality and the forms and shapes of social protection changed only partially in the directions suggested by would-be reformers, and only after repeated negotiations and vetoes. The Uruguayan social state was under major strains, from both exogenous and domestic forces. Why the country chose to reform as it did, inevitably has to take into account these forces, their complementary resistance carved in one hundred years of history, and its recent transformational attempts.

These in turn should lead us to the political variables that help us understand the policy choices made in the last 15 years regarding the reform of the social state.







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