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

Fernando Filgueira & Carlos Filgueira
The process of reform is still unfolding and the final outcome not certain yet. The magnitude of the task that lay ahead the new democratic administration is one simple factor that accounts for the lengthiness of this process

4. The long and winding road to reform.

As we have tried to argue on our brief history of the Uruguayan Social State the period that goes from the 1960s to 1970s can be considered as one of denial. One in which all relevant actors playing the distributional game chose to look the other way and shift the blame from one to the other. Uruguay was living above its means, and it did not want or its political system was not able to, impose the necessary costs of adjustment that such a reality required.
Shock and the closing of communication between its different participants followed the period of denial.

A military dictatorship closed the channels of demands and participation and imposed the costs of austerity. It did not advance much in the way of social sector reform, limiting itself to cut social expenditure, rather than changing its institutional design and its sets of rights and duties.
From 1985 to 1989 the new democratic administration, with the complicity of the opposition seemed to go back to an exercise in denial.

A closer look, though, suggests the need for a more accurate diagnosis. Rather than denying a constraining reality, the Uruguayan political system and very especially the government sought to administer the crises of the social state. In order to do so it attempted to control public expenditure, limit the expansion of new services and benefits and increase forms of basic coverage. This was an attempt to reshape a social state oroginally oriented to middle class expectations, to more realistic goals. The new administration allowed for the recovery of the old participatory channels while at the same time it made abundant use of the few but important institutional resources it had at hand to limit, defer and mediate demands.

The process that this government strategy unleashed is worth a more detailed analyses. It illustrates the peculiar ways in which the political system and the social state interacted supported by and reproducing an environment that was conducive to "voice" and that made extensive use of "loyalty", rather than "exit" from the social state and its programs.

The two administrations that followed attempted to reform the social state in a more radical form. The Lacalle administration
(1990-1994) relied on a more market oriented paradigm and its attempts were systematically vetoed. It was able to show some success in the development of new flexible programs oriented at targeted social policies, though without dismantling the previous universalistic matrix, but simply adding a layer of policies traditionally underdeveloped in the country and targetting within the old social programs.

The present administration, has so far, showed an impressive record of reform in the areas of social security and public education, and is getting ready now to face health sector reform and the state role as regulator of the labor market. The next pages will precisely deal with social sector reform in those areas.

Besides the specificities of each sector and the challenges that are unique to each case, we will try to show the common political dynamics in which "voice" and "loyalty" led the reform process, and in doing so ended up producing a unique blend of the new wisdom in social policy and the old statist and redistributional legacies of one hundred years of social programs.

The process of reform is still unfolding and the final outcome not certain yet. The magnitude of the task that lay ahead the new democratic administration is one simple factor that accounts for the lengthiness of this process. A scant review at what the system looked like circa 1985 and the major challenges and problems it faced, will help us convey the message more clearly.

Regarding labor rights and labor capital relations, the situation, resembled, as we noted, that of the years before the coming of the dictatorship. Labor rights both collective and individual were by regional standards comparatively high. They included unemployment and sickness benefits, labor courts in which an employer had to demonstrate reasons for firing or pay for dismissal in proportion with time in the job, constitutionally granted rights to organize and strike, and public status of the trade union movement as legitimate representatives of workers in all labor disputes and bargaining.


i. Social Security Reform: coming to terms and sharing costs.


In 1995 Uruguay finally reformed its Social Security system. It moved from a state monopoly "pay as you go" system to a mixed system that included private agents and mandatory levels defined by income of individual capitalization. This is no doubt, the most important reform to the system since the 1950s when the last categories of workers were included and the 1970s when the system reunified under one centralized agancy most categories of workers. The system was in financial disarray since the 1960s, and the situation had worsened in the last thirty five years. The reform had been on the agenda of the last two democratic administrations. Furthermore several projects of reform had been discussed, and many of those actually sent to congress where they had been systematically defeated.

Four aspects of the final outcome of reform should be highlighted. The first one is that the rights and benefits of retired persons in the old system where not affected, and in the years that go from 1985 to the actual reform, the quality of benefits improved. More specifically a social movement composed of retired persons was able to gain the support of the people and in 1989 through a plebiscite approved an amendment to the constitution in which pensions were to be raised each time the state functionaries received a raise and in the same proportion as the mean wage index. This, in short as a constitutional guarantee against the erosion of benefits quality. as a matter of fact, since public wages were indexedby past inflation in a context of declining inflation, benefits quality actually improved.

The second aspect that is important to keep in mind is that the first pillar of the new system is not a capitalization system but a pay as you go system , and that everyone has to contribute part of their income to it. Being in the capitalization pillar does not excuse workers from contributing to the pay as you go system, which will remain the monopoly of the state.

Thirdly, while the administration of capitalization funds (AFAP´s), can be in the hands of private agents, the state is also present with its own AFAP, and has to date, more than fifty per-cent of the market share. A additional statist feature, is that the 80% of the AFAP´s capital has to be invested for a period of time in state treasury bonds.
Finally, this reform only covers old age, disability, and survivors benefits. The system of social security includes besides that, unemployment, family allowances and non contributory pensions. Those remain within the state administration and are funded as before. An additional feature that so far holds but might change and that marks an important difference with other regional experiences
(see Kay, 1996), is the fact that employers continue to contribute to the system.

Thus while this reform constitutes a clear departure from the old system, it is a far cry from the Chilean model, and also remains statist and committed to some redistributional goals, that have been rather neglected in other countries experiences
(Mesa Lago, 1994).

To understand this peculiar outcome one has to introduce on the one hand the development of the previous system and on the other, the political logic that dominated the last 15 years of the country, when reform was on the center of the agenda.

The single most important development regarding the arena of social security policy, was the emergence in the first democratic administration of a social movement of retired persons that was able to form a successful coalition with the trade union movement and with a good part of the political opposition.

This movement did not emerge from nowhere. Retired persons, awaited with great expectation the return to democracy, seeing there the possibility to recover some of the value lost during the dictatorship. An agreement by social and political forces previous to the return to democracy, established the general aim of doing just so, especially favoring those pensions that had lost more value (the older people and poorer people) by establishing differential indexation criteria.

Raises were given, but below the level that had been established. To increase the discontent of the beneficiaries, those that had the better pensions saw their benefits increase at a slower pace than the other pensioners.

An additional factor that must be kept in mind is that neither those already in the system nor those approaching retirement had any easy ways out of the system. Private funds were in place even before 1984, and increased somewhat after a law regulating them was passed. Yet these were complementary funds outside the public system, and contributions to the public system still had to be done at the levels defined by law. To have a sense of how small the "exit" option had advanced consider that all private complementary funds added to 3000 persons
(Mesa Lago, 1994). The public social security system covered more than 700000 people. In Hirschman´s words members were securely "locked in" the system. Thus followed the activation of "voice" from the more quality conscious members. By 1989, this social movement was able to approve the constitutional amendment.

Eighty percent of the population voted in favor of the amendment. Thus an important degree of "loyalty" was also present in most of the population. Loyalty should not be confused here with faith or solidarity. Both faith, in the sense of a sort of statist religion that underpins Uruguayan political culture, and solidarity, emanating from an egalitarian social structure and an egalitarian culture, fearsome of large differences, probably had its share of influence. But by "loyalty" we are refering to the commonsensical reasoning that with imperfect information people make and through which they evaluate the chances that a system can be improved from the inside, against the uncertainty and risks involved in dropping out and seeking alternatives outside the system.

The Lacalle administration was then faced with a time bomb. A system that was already without financial resources, would require even more of the state resources if it was to meet its obligations. The administration adopted a two pronged strategy. On the one hand it increased taxes to meet the new demand, and made it absolutely clear that the reason for raising taxes was the people's vote in the plebiscite. This made people realize more clearly than ever the costs of generosity, and also the need to reform the system.

On the other hand it pushed forward an ambitious project of building consensus under technical criteria in a multyparty commission. By 1992 the commission came up with three alternatives, and picked a reformed pay as you go system with tougher retirement ages, adjusted periods for the number of final years for benefit determination, and a much closer relation between contributions and benefits. Strictly speaking this was a far more moderate law than the one that was finally approved in 1995, yet congress blocked the 1992 proposal.

The major reason was that the overall thrust in Lacalle´s reformist impulses were perceived by the population as to radical or neoliberal, and had turned the colorados -a reluctant partner so far- into something closer to opposition than coalitional partner. Three additional attempts were made by the Lacalle administration, all of them defeated.

The major outcome of this period of failed reformist impulses, was on the one hand making reformers come to the conclusion that only a strong and wide coalition would be able to pass important laws of reform. On the other hand, these years allowed for the accumulation of domestic technical expertise on the subject and the configuration of basic political consensus regarding the viable options of reform. In fact the, 1995 reform, was quite similar with one of the alternatives handled but finally not proposed by the technical multyparty commission of 1992. One major difference, that we suspect but have not been able to confirm, between 1992 and 1995, is that the costs of transition in 1995 were mostly covered by an Inter-America Development Bank loan of 150.000.000 U$.

The national election of 1994 in which the left coalition captured a third of the vote (same as the colorados and blancos) was the decisive and final component that glued the colorado-blanco coalition and allowed them to carry out the social security reform. Overall the final outcome has been positive; honoring entitlements, maintaining and important role of the state in the new model, and keeping some redistributional instruments both inside the new system and in the programs that remain in the BPS.


Social Security Changes 1985-1995

  1985  1990-1991  1994-1995
Real per-cápita expenditure (a)  238.2 (b)  304.1  447.8
Expenditure as % of GDP  12.0  13.1  17.0 (b)
 Type of system Pay as you go State monopoly  Pay as you go State monopoly Old system remains unchanged for retired persons and persons close to retirement. New system combines pay as you go and capitalization system. Private and public administration
Family Allowances  Universal For low income families For low income families
Health Insurance for retired persons  No  No  Yes (1997)
Sources: Cominetti, 1994; CEPAL, 1996; descriptive statements from multiple sources. (a) in 1987 dollars; (b) estimated from Cominetti and CEPAL.

A process of reform that has as its major moments a plebiscite, a multyparty commission and a broad coalition that passed the law in congress stands in sharp contrast with decrees, dictatorships, and semiauthoritarian measures that dominated the processes of reform in other Latin American countries.

A reform that allowed for present day beneficiaries to increase the real value of pensions, that kept a strong hold of the state on the overall system and that maintained some explicit redistributional measures, should not then, surprise us.
ii. The reform of education: the stubbornness of public goods.
Public education, once the pride of the nation, was perceived, with no small reason, to be in shambles at the return to democracy. Teacher's wages, inadequate infrastructure, overcrowded classrooms, curricula's inadequacy to labor market needs, and an important number of parents that had chosen to "exit" the system, and seek private alternatives, were just the most salient symptoms of an important crises.

With democracy the administration of primary and secondary education returned to a semiautonomous decentralized structure and the University to its selfgoverment, though it remained dependent for resources on the central government. These were symbolic gestures - and consensual for that matter-, that did little to improve the quality of education.

The teacher's association pressure for increased funds and the University pressure, together with governmental interest given the perception of the population and the high legitimacy of potential measures allowed for some more substantive changes than the formal ones. Measured in real terms as percapita expenditure, education expenditure increased some 70 % from 1985 to 1990
(Cominetti, 1994). As a percentage of GDP the increase is far less spectacular, but we have to consider that the GDP was growing, and so was the share of education: it went from some 1,5 to 2.1 and then down again to 1.9, between 1985 and 1990 (Cominetti, 1994).

No major structural reforms were attempted during the first administration, besides some increasing attention to schools in poor neighborhoods. The Lacalle administration continued this trend, and developed a system by which some schools in neighborhoods with high levels of Unsatisfied Basic Needs were defined as schools of "priority requirement" and teacher's wages increased accordingly as a premium.

The year after the last election, 1995, saw again the launching of the most ambitious project of reform, known as the "Rama reform" for it is German Rama, previously the director of CEPAL in Uruguay, the president of the CODICEN and leader of this reform. The most important features of this reform can be summarily pointed out.

In the first place, it strongly reforms the high school curricula, loosing much of its humanist bend and increasing pragmatic content that prepares the individual for the labor market, rather that for college. This transformation implies a regrouping of subjects and the preparation of professors with training courses to meet the new demands. Secondly, this reform, undertakes the very ambitious aim of expanding public, free and obligatory education to preprimary level, something that had been done through private schools before and that had increased significantly for middle and upper middle classes in the last two decades.

This fact had been pointed out in analyses carried out by CEPAL in previous years to be a major factor in children's performance in later years, and thus a major element in potentially increasing the inequality of human capital allocation. In the third place, the reform seeks to develop for some areas full-time schools and has already launched some pilot experiences. The central idea here is to keep the kids out of the streets, and provide a frame of reference that goes beyond teaching and includes services and some presence of role models.

To understand a reform that quite clearly opposes the blueprint of market oriented social reform we must take three factors into consideration. The first one is that even the Multilateral Lending Agencies are much more tolerant of state expenditure in basic education than in other sectors such as social security. Secondly, the legacies of a comprehensive and for the most part, high quality system of public education in the fifties and sixties, left an indelible mark on political elite's perspective and on the citizenry in general regarding the desirability of public education. Finally, "voice" and "loyalty" were present again as basic mechanism that became activated to confront the deteriorating quality of education. We shall concentrate on the last two aspects.

Education was the myth of the Uruguayan social state. Perceived as founder of citizenship in a country of immigrants, ladder of social mobility for a people with middle class expectations, and guarantee of equality and equal opportunity, any attempt at dismantling the public system would have been penalized strongly by the electorate. Even more importantly, it is doubtful that most of the political elite would have, from their own convictions, supported this kind of transformation.

A good part of the political elite was a product of public education. Yet it is true, that there was a crises, and it is also true that the state had few resources. The signs that the people gave to the political elites were clear enough, and deterred any strategy of reform by default on their side.

In 1989, previous to the national election, one of the longest strikes of the period took place and it was led by the teacher's association. Interestingly enough, despite the disruptions that such a strike had on people's life this strike survived because the people and of course the rest of the trade union movement, including at moments the teachers in private education, supported it. This conflict coupled with internal conflicts in the colorado party hurt the government chances for electoral success significantly. The strikers pressed for increases in wages and budget under the general banner of a dignified education.

The next administration gave an important, but nonetheless unsatisfactory increase in wages to teachers, but was always under the threat of a major conflict unleashing. Soon came a more drastic warning. The teacher's association, the leftist coalition and the trade union movement proposed to plebiscite in 1994 a constititutional amendment that would grant a 27% fixed floor of the national budget for public education. At the time it did not reach 15%.

This time the political elites of the traditional parties did not escape confrontation as they had done in the retired people's proposal, and the amendment was finally defeated. "Voice" again in the form of direct democracy and trade union pressure had made a tough entry and warned elites that it would not only veto privatization attempts, it would also not stand silent at a reform by-default of the public system. Maybe in this case, "loyalty", is clearer than ever. The "exit" option, is for an important part of the population certainly available, and in effect many have exited, doubling and tripling between 1985 and 1992 the enrollment in private schools and high schools. Yet many parents sent their children to public education because it was "the right thing to do" not because they cannot afford another option while the system lost quality, postponing the "exit" option.

Furthermore, and this is were "loyalty" in the sense Hirschman gives it operates in its strongest form, public education constitutes a public good that Uruguayans feel they can never "exit" completely, even if their children attend private schools. Public education has an effect on the social fabric in general, from which they cannot extricate themselves -or at least that seems to be their perception if we consider the overall support that the public education systems and the corporations representing its demands had received until the start of the "Rama reform" in 1995.

After the "Rama reform" was launched strong corporatist veto groups started to question what had in fact the broad consensus of the political system. Another strike by students and teachers at the secondary level attempted to roll back reforms and criticized the reform for being imposed without dialogue on the people that would actually have to live with such a reform.

This time around support from the population was less clear and with time the corporations accepted reluctantly what was mostly a symbolic gesture by the authorities to open dialogue mechanisms. So far the "Rama reform" continues to evolve, and opposition, while active is concentrated and has received little support from the broader political arena.

Tertiary education, until 1984 the monopoly of the state university has undergone transformations that fit better with the overall market oriented paradigm of reform. In 1984 one of the last decree of the military regime was to grant tertiary level credentials to the Catholic Institute Dámaso Antonio Larrañaga, recognizing many careers as equivalent to University careers. Between then and today three other higher education institutes have been accepted, and some more are applying for such status.

Between 1985 and 1997 the improvement in education has been scant, but compared to the deterioration of previous years it has improved. The fiscal effort, the real expenditure and the expansion of services with a strong redistributional bend support this statement.


Evolution of public education 1985- 1995

  1985  1990-1991  1994-1995
 Expenditure as a % of GDP 1.5  1.9 n/d 
Real per-cápita expenditure (a) 42.4 (b) 71.7 72.1
Public pre-school system  Only covered 5 years old children Expanded for some schools to 4 year old children  Aim at universal coverage for 4 year old children by 1999
Full time Schools No Pilot experiences Expanded
Priority requirement schools No Yes Yes 
Sources: Cominetti, 1994; CEPAL, 1996; descriptive statements from multiple sources. (a) in 1987 dollars; (b) estimated from Cominetti and CEPAL.

The legacies -both ideological and structural, of a largely successful system in the past, the pressure of corporations and citizenry activating "voice", backed by important degrees of "loyalty" towards such system, and the responsiveness of a highly democratized political system with access to direct channel of policy prescription, contributed to put a stop on public education decay, and contributed to shape a reform, that has as its main blueprints the expansion of the state role in basic education, redistributional goals, and a shift from a system that prepared "doctores" to one that also prepares young, non-college oriented workers.

iii. Facing health care crises.

Someone said once, that "if you want a health reform, you need a military regime". Going against the medical corporation, the laboratories, the mutual aid societies and the medical red tape and bureaucracy is not a task to be carried out in a democracy. Uruguay so far seems to support this statement. A national health care plan was accorded by all parties and social groups prior to the return to democracy. It was never even attempted to launch that program of reform. More recently the health ministry sent a reform to parliament. The minister of health went back to his day job, and parliament never treated the project. This neglect to treat health care reform projects is in no way due to the fact that the system is in good health -to play with words. On the contrary, the Uruguayan health system is in serious trouble, and according to some on the verge of collapse.

The system of health care in the country is a complex articulation of private and public agencies that interact with each other at different levels (cooperation, financial, etc.).
Historically two different systems can be distinguished. On the one hand the private system in which mutual aid societies (MAS) covered the middle and upper classes and with time part of the working class, and on the other the public system that covered those that could not pay the fee of the MAS.

In the 1960s and 1970s, bilateral agreements between state agencies and MAS created a system by which state employees, with a small discount could become members of a MAS. The state in this way started to subsidize the MAS and their employees health care cost. In the 1970s some laws and tripartite agreements opened the door for the first categories of private workers to a similar deal. Now employers, employees and the state contributed to the health care of the individual.

In 1984, the mechanism became universal as the last categories of formal sector workers (rural and domestic service) acquired the right to a mutual aid society. These mandatory health insurance was administered by a new state directory (DISSE) that played an intermediary role between the worker and the MAS of choice.

By 1988, according to the Ministry of Public Health, 1.400.000 people were members of mutual aid societies. The public system continued to serve around 1.000.000 people, and some private or specific public facilities (Military Hospital, State enterprises medical facilities) added to an almost complete coverage of the Uruguayan population. There is no doubt that the implementation of the agreements between the state and the MAS and afterwards the creation of DISSE increased coverage in the higher quality layer of health care, and did so with a strong redistributional bend (the amount of money one pays to belong to a MAS from one's income, is proportional to that income).

Less clear, given the increased costs of customer co-payment meant at controlling consumer use, is how much the new popular sectors incorporated to the system could and actually did use the system (Sánchez and Fernández, 1995).

This process of incorporation of new sectors also placed strains on MAS. As a matter of fact these societies were already in financial trouble before this system was implemented; this process increased the problems, and the solution was a strong subsidy from the state to keep the MAS system working. Coverage in better quality services increased, but its flip side was that quality in those same services declined as overcrowding evolved and financial resources lagged behind. Also some costs in the form of strong raises in medicine tickets and red tape costs were passed on to the consumer -i.e. the member of the MAS.

In the 1980 a third form of medical service appeared: private emergency mobile units. These services also used a cooperative prepaid monthly quota that allowed for very low fees by redistributing costs and risks.

A large part of the middle classes, and almost all of the upper middle and upper classes became members of these services. Mutual aid societies were particularly slow and inefficient regarding minor primary treatment and emergency and out-patient services, and these were precisely the areas in mobile units -which later added basic primary care centers, attended. As a matter of fact, most people that could afford it paid a double fee, one to the MAS and one to the mobile emergency service.

The end result, is that the country is moving to three tiered stratificational structure in terms of health care: those that cannot afford to pay for health care or can afford very little and thus end up in a public system with stagnant or declining quality, those who only pay for a mutual aid system with declining quality, and those that are members of MAS but can also pay and choose to do so the emergency and out-patient new services.

"Exit" has no doubt in this case played an important role, but in a very peculiar fashion. The private system of MAS, at first open to "enter" or "exit" between different mutual aid societies, has become the basic system for more than half of the population, and there never truly was for the better off an "exit" option. The better off (middle classes and up) were content with a relatively elitist and stratified system of MAS. DISSE significantly changed that.

A worker could choose any MAS´s he wanted and that did not influence how much was taken from his salary. Thus the best MAS´s increased membership, and with time only those efficient at managing larger numbers and maintaining minimal quality survived. "Exit" from the system was as hard as ever, but "exit" within the system (that is between different Mutual Aid Societies) became easier, to the extent that it could be done at no cost by the customer.

A partial form of "exit" emerged: emergency mobile units. But it was only partial, since they did not provide hospitalization services, thus "locking-in" members to the MAS system. In that way better off people financed the entry of worse off people to the MAS system by paying the loss of quality it brought with it in the market. Yet it is not clear that the MAS system does a better job at caring for the poor than the public system. If they do not, then the Mutual Aid Societies themselves, their inefficiencies and the medical corporation might be the ones benefiting from the state subsidy.

The problem now faced by the health care system, is that the MAS system is in deeper financial trouble than before, and quality suffers proportionally. "Voice" has so far only barely been activated, and mostly by the medical corporation. The beneficiaries have voiced complaints but in no organized way yet. Also the Public System is said to be understaffed, inefficient and with inadequate financial resources.

The Uruguayan health care system is extremely complex and concentrates most of its funds in tertiary and secondary levels of health care. It is true as Uruguayans perceive, that "no ill person will be left without health care". Yet that is no longer the point. Quality and preventive care have become critical issues for assessing the progressiveness of a health care system around the world. While health is in the minds of Uruguayans a public good, and has become more so as the state has taken responsibility for the insurance of workers and for the financial health of MAS, the quality of such public good, will only improve, if "voice" from the beneficiaries can form and be heard regarding issues beyond coverage.

That is as we all known rare, regarding a health care sector that does not have for more than half its institutions democratic decision making arena in which beneficiaries are represented. The other option is that the political system will be able to push forward reform and impose it over the medical corporation and the MAS system. So far the only major reforms to the health care system in Uruguay have come from the only two dictatorships in the 20th century. As we mentioned recently a law for reform of the health care system was sent and not even considered in congress, soon afterwards the Minister of Health resigned.

Despite these shortcomings, one issue is worth highlighting: the demands of the medical corporation are not about freedom to "exit" the system, but about more funds for the system. The bulk of doctors know that their jobs and well being, however limited it might be, depend on large, subsidized, cheap health care, not on top notch private practice. Consistently, and despite the problems that have been mentioned, public health expenditure has significantly increased in the last fifteen years, even if such increases may have been not enough to stop quality decline.


Public expendirture in health care 1985- 1995

  1985 1990-1991 1994-1995 
Expenditure as % of GDP 1.0 1.3 2.7
Real expenditure per-cápita (a) 56.6 (b)  79.2  102.4  
Expenditure as a percentage of total expenditure 6.8 7.2 n/d 
Sources: Cominetti, 1994; CEPAL, 1996; Sánchez and Fernández, 1995; (a) in 1987 dollars; (b) estimated from Cominetti and CEPAL.


iv. Housing reform: too much ado about nothing

Like in most Latin American cases housing policy has never truly entered the realm of the social state, or has done so much less that other social policies. If something is characteristic of housing policy in Uruguay it is its inconsistency, lack of stability and continuity, and relatively low development.

Furthermore, housing policy in the country can barely be considered neutral, if not outright regressive. During the military government some steps taken actually worsen the situation; a) The BHU, establishes criteria for the access to loans that allow almost exclusively upper and middle class sector to apply for those loans; b) some resources for housing that were outside the BHU (municipalities, emergency housing funds) are brought under the general directorate of the BHU further reducing resources for low income families; c) a system of "promotores" (private construction entrepreneurs) is set by which if they come with 20% of the construction cost they receive subsidized loans, favoring speculative maneuvers for those with enough capital to do so, but has little to do with social policy aims; d) a long tradition of credit for cooperatives and mutual aid undertakings that were organized by civil society are cut.

The end result of these measures was the booming of housing solution for privileged sectors and a subsidy to the construction industry. Probably this was the worst period Uruguay knew in terms of housing policy. With democratic restoration things change for the better. The first democratic administration restores funds for emergency and low income housing and separated it from the BHU, distinguishing between funds oriented to facilitate the typical middle class self financing of housing, and policies truly oriented towards redistributional goals.

Also an attempt is made to develop some lines of financing in the BHU towards lower middle class sectors. these attempts are made as the bank and housing policy in general faced one of the worse crises, legacy of the inefficient and abundant loans made before by the BHU. One of the most important achievements of the Sanguinetti administration was indeed a most modest one: not to close the BHU, and leave housing issues completely in private hands. The cost was that the housing policy for a depressed middle class had to become tougher, as the bank adopted a more market oriented profile. Loans became tougher, repayment harsher and interest rates less subsidized.

The Lacalle administration attempted to introduce more important reforms in the housing policy areas. On the one hand it developed a quinquenial plan of housing for low income families that was only partially developed. On the other it finished the job of increasing the market orientation of the BHU. The fact that a family unit has to have considerable savings in the bank (60 UR) and an income of a little more than 1000 U$ a month, makes loans unavailable to poor and even not so poor people. The Lacalle government created the Ministry of Housing, Territorial Organization and the Environment, to carry out the quinquenial plan and to develop new innovations in housing policy.

A limited budget, the absence of open credit lines from MLA´s and the overall hegemony of the BHU regarding the housing issues, made such a long name rather ineffective. Nevertheless, the Ministry carried out part of the original program, and this program later evolved during the second Sanguinetti administration. As credit lines opened the program became oriented towards the construction of "NBE" (Nucleos Básicos Evolutivos; Basic Evolutionary Units) that provide low income family with minimal housing facilities that are expected to "evolve" by the combined efforts of NGO´s incorporated in the program, the state and the beneficiaries.

Despite the relative neglect of authorities for housing policies, and interestingly enough, the issue has recently been put in the center of debate. The president has been designated to head a commission for the eradication of precarious settlements and the development of housing solutions for this population. Many have read this as a populist measure as electoral times, that come early to Uruguay, approach. No doubt that is part of the reason. The left coalition has in the last elections grown disproportionally in precisely those settlements.

No big surprise was, then, the fact that the major of Montevideo from the left wing coalition asked to be in that commission. If these measures are simply a promise before and a denial afterwards, or if they are developed without adequate resources and risking fiscal discipline and economic development, let's dubbed them populist. If such is not the case, or at least not completely the case, let's call them what they are; government responsiveness to voting patterns in a democracy.

The votes of the poor matter and no fear should come to our disciplined fiscal hearts for that. Uruguay, has shown, too many times that it will spend more than it should, and that the political logic can indeed cause fiscal disasters. If it has learned the lesson, without forgetting that politics is about distributing and redistributing resources, at least to a limited extent, then we should take such development as a promissory note, not as a political threat to efficient economic management.

v. Labor-Capital relations and the flexibilization of the labor market: the limits of reform

As we mentioned in the brief history of the Uruguayan social state, the 1940s saw the return to democracy and the new found vigor of the trade union movement. The import substitution model that dominate the country from there until the 1970s permitted the development of a strong labor movement that was able to negotiate and win important rights for workers both at the collective and individual level.

The political economy behind these developments was one in which markets as constraints operated only weakly where trade unions were present (urban protected industry), and strongly were they weren't (primary exports of cattle and wool). In effect in a protected industry environment with little competition survival depended more, political lobbying for protection and subsidies were more important than efficiency and productivity. The game played between workers, the state and the entrepreneurs was one of "voice" rather than "exit".

Thus this was a context in which the organizational and numerical power of the working class increased significantly and many times matched the structural power of domestic capital. In such a context working class conquests were indeed large. between 1970 and 1985, Uruguay went from a structure in non-traditional exports accounted for 28% of total exports to one in which those kind of exports are 65%
(Filgueira, F and Papadópulos, J, 1997). Those new export oriented entrepreneurs were price takers in the world market and had to increase productivity and efficiency to remain competitive. Wages, taxes on wages, firing and hiring costs, and wage bargaining had to be brought under control. Entrepreneurs began to favor a new less centralized and less politicized form of trade unionism, decentralized wage bargaining and more flexible labor markets.

Yet to achieve these goals they had to confront a strong trade union movement under a democratic regime. The first Sanguinetti administration restored the overall institutional framework regulating the labor markets that used to be in place before the authoritarian regime.

The Ministry of Labor recovered many of its functions mediating labor disputes, upholding workers individual rights and overlooking labor-capital relations in general. The "wage councils" started to operate again with the participation of the state, entrepreneurs associations and trade unions negotiating at the sector level. In the state, workers did not have wage councils, and informal bargaining and at times open confrontation took place to set wage levels.

The administration was particularly tough in the first years regarding state workers unions, declaring state services as services of "essential need" -a constitutional right- in order to break up strikes.

One important difference with the system of wage bargaining from pre-1973, is that the executive could decree "ceilings" for wage increases to the private sector. In this form it attempted to control inflationary pressures and protect those sectors without bargaining capacity from the inflationary game. Regarding the labor market normative aspects, no relevant changes occurred in this period.

The Lacalle administration as it had done in other areas attempted a more liberal approach to labor market regulation and labor-capital relations. In the first place it announced that it would regulate the right to strike and move to decentralized system of wage bargaining without the participation of the state. In the transitional period from one system to another it would fix wages by decree. None of this proposals were carried out, as the trade union movement greeted these news with three consecutive general strikes. Nevertheless more decentralized forms of negotiation and the partial retreat of state as a mediator have slowly developed. Labor market flexibilization has also taken place, but not through executive decrees or even congress laws but through the agreements reached between business associations and the trade unions.

In this sense it is quite clear that adaptive changes are taking place where they are more needed; that is, in export oriented sectors and enterprises. In effect agreements on productivity, technical change and more flexible productive systems reach almost 50% in high export enterprises, while less than 25% in businesses that export less than third of their production
(Pucci, 1992). Also sectors with a strong export orientation reach firm level agreement for 20% of the cases, while non-export oriented sectors firm level agreements are less than 15%.
These data is for 1991-1992, and it is reasonable to expect that the trend continued to our days.

Besides these changes the flexibilization of the labor market has been once again brought to the political arena. The reason is quite simple. Unemployment has reached 12% of the population and remains high despite growth in the economy. Liberal oriented reformers and businesses have argued that the responsibility for this state of affairs is a rigid labor market and especially the high costs associated with hiring and firing people.

So far the government has not moved in that direction, and trade unions have not yet either had to move against these proposals. To a large extent flexibilization is being processed on case by case basis. Where capital enjoys structural power, more flexible arrangements are usually imposed, and informal labor-capital relations take shape. Where trade unions are powerful but the economic environment truly constraining, businesses and trade unions have or are in the process of negotiating agreements.

vi. The new targeted social policies.

The new generation of targeted social policies are a veritable product of the last 15 years in Uruguay. The military dictatorship had experimented with some paternalistic social policies for marginal sectors without much success, and had also, with better results, developed vaccination campaigns and expanded maternal infant programs. Yet none of these programs are really the idea of targeted last generation social policies that have mushroomed in Latin America in the last decade and a half. The first democratic administration did little to develop this kind of programs. Two stand out for its magnitude.

One was the CAIF (Infant attention centers) centers with the support of UNICEF which developed important levels of maternal and infant protection; the other were programs of food distribution for retired persons and the shift form the traditional community kitchens to food coupons. Little else was done until the Lacalle administration. His was a more determined attempt to develop the new paradigm of social policies and for that a particular institution directly dependent on the executive was created: the PRIS (Social Investment Program).

Later this program would change its name to FAS (Fortalecimiento del Area Social; Strengthening of the Social Area). This program had three very ambitious aims. In the first place and following the dominant discourse in social policy it was meant to become the basic flexible and targeted instrument to combat extreme poverty through strategic investment (construction of emergency housing, donations and infrastructure for primary education, integrated nutrition and health programs).

Secondly it was aimed at developing technical expertise on social development issues and social programs diagnosis, becoming the center of information on social indicators and playing a critical role as advisors regarding allocation of social expenditure. Thirdly, its most ambitious goal was to guide the reform of the social state, form its present day, statist, centralized and universal matrix, to an integrated set of better targeted and decentralized social policies. For such tasks the PRIS-FAS experience received a total budget of 70.000.000 dollars, of which 57.000.000 came form MLA´s loans.

Of the three goals, only the first and second, and to a limited extent have been carried out. Though less visible, and with far less impact than expected, the PRIS-FAS has invested in critically poor neighborhood and has become a partner in other social sector programs contributing informational resources and financial support. Also, a number of documents on social development and social sector diagnosis, did become influential references to policy makers and social sector staff.

Yet as can already be seen, most of the contribution made by the PRIS-FAS has been achieved by integrating itself with previous sector policies rather than by-passing them or creating a parallel matrix. It should not surprise us then, that nothing was achieved regarding the more ambitious aim of reforming the social state from a technocratic logic. To put it more strongly, in words of Midaglia (1997); "in the PRIS-FAS experience flexibility and technocratic insularity were its strengths in order to be approved and its weaknesses in order to change things and become sustainable. You cannot by-pass social sector logics. Reform in a mature social state comes from within the system, fighting the political fights that have to be fought".

5. Closing remarks.

This paper theoretical purpose grew out of few paragraphs in Hirschman´s "Exit, Voice and Loyalty. Responses to Declines in Firms, Organizations and States" so we now let him speak:
"...a no-exit situation will be superior to a situation with some limited exit on two conditions:
(1) if exit is ineffective as a recuperation mechanism, but does succeed in draining from the firm or organization its more quality-conscious, alert, and potentially activist customers or members; and; (2) if voice could be made into an effective mechanism once these customers are securely locked-in". Also: "the two principal determinants of the readiness to resort to voice when exit is possible were shown to be: (1) the extent to which the customer-members are willing to trade off the certainty of exit against the uncertainties of an improvement in the deteriorated product; and; (2) the estimate of customer-members have of their ability to influence the organization"

Finally regarding the issue of exit, voice and loyalty from public goods:

"Actually, of course, a private citizen can get out from public education by sending his children to private schools, but at the same time he cannot get out, in the sense that his and his children's life will be affected by the quality of public education."

It is no coincidence that Hirschman chose public education as an example. Social policies are cases were these hypothesis render themselves most productive. What struck us from the last quote is the fact that today in large parts of Latin America, complete "exit" from public goods is possible, or at least is perceived by elites and upper-middle classes to be viable.

This has been pointed out by O´Donnell recently: "Many of the rich opt for exit: living in fortified ghettos, sending their children to well-guarded schools where they will only meet the children of people like them, moving their offices out of downtown or other dangerous areas, mistrusting the inefficient and often corrupt police and hiring private guards, and making trasnational society, more than the national society, the frame of reference of as much of their activities as possible".
Uruguay, has gone down that road to a limited extent, but clearly not to the degrees seen in other Latin American countries.

The social state, and the response to the decline in the quality of the public goods it distributed, has been able to rescue the public dimension of those goods.

Using the hypothesis about the interactions between exit, voice and the regulatory role of loyalty, we have tried to explain why Uruguay responded to the challenges of reforming and updating its social state in the way it did.

The answers are promising in terms of the productivity of these categories. The likelihood of people exiting public goods depends on a number of aspects. We have tried to show that none of these conditions was present in most cases in Uruguay:
a) there has to be a system of private goods offered in the market to replace the public good that is being exited.
Education did hava such a system, Social Security to a very limited extent, and health care while with an important private component was infiltrated by the state, and no purely private options opened up for comprehensive health care.

b) the distribution of income and economic resources has to present an important group of people with the means to exit, or a small group with high income in order to develop viable exit elitist alternatives. Uruguay has lowered its upper-middle class expectations, and decreased overall inequality. A large depressed middle class is not likely to exit for the simple reasons that it probably does not have the means to do so.

c) legal barriers and captive institutional structures deter or ban exit options. If exiting the system allows a person to stop contributing to the system, then exit has more chances of becoming the preferred option. In no case, besides housing, is that an option in the Uruguayan social state.

If these conditions were not conducive to exit, but rather to loyalty, other ingredients made the system conducive to voice as a mechanism to confront the decline in quality of benefits. One, has already been hinted at: quality-conscious members were many times locked in the system or had to accept the fact that even after exiting the system they could never perform a complete exit from the externalities that a decline in quality would have on their lives. The other aspect that will help voice become activated is the belief of the member that things can actually change through the activation of voice. In this sense Uruguay, stands a better chance than its Latin American peers given its perception of the legitimacy, responsiveness, accountability and usefulness of the democratic system.


Opiniones sobre democracia en siete paises latinoamericanos
1995 (% que responde afirmativamente)

  Argentina Brasil Chile México  Paraguay Uruguay  Venezuela
La democracia es preferible a cualquier otra forma de gobierno  82  48 54 57 58  86 64
Satisfacción con el funcionamiento de la democracia en el país 53 31 34  24 31  59 38
La democracia permite que se solucionen los problemas del país 59 51 51  52 39 63 53
Las elecciones en el país son limpias 78 26 82  52  39  83 19
Los senadores y diputados se preocupan de lo que piensa la gente como uno 19  16 24 24 28 38 16
La manera como uno vota puede hacer que las cosas sean diferentes en el futuro 75 53 56 53 62  77  52 
Source: Kaztman, 1996 (with data from the Latino Barómetro).

Voice has been able to play a major role in the defense of the social state. In fairness it has been less efficient in producing innovations. The educational reform and the social security reform have passed despite voice (that defended the traditional systems). As we have argued voice was critical. It vetoed or warned against radical liberal reforms and it put a stop in quality decline. Yet it was a changed political environment regarding party competition -the near victory of the left that glued a Blanco-Colorado coalition, that was finally responsible for reform
(Filgueira, C & Filgueira, F. 1997).

Is then voice simply efficient as a defense mechanism and at setting limits for reform and not as a force of innovation? That might well be so, and not necessarily bad, as long as the competitive dynamics of the party system facilitate cooperative behavior among parties to democratically craft congress majorities for reform and innovations. But what if the political system becomes blocked?. Might "voice" become irresponsible again, simply increasing the load on an already overloaded system. Let us invite the reader to a rather odd exercise in interdisciplinarity.

Pragmatics is a relatively new discipline that has grown as an offspring of linguistics, combined with the legacies of rhetoric and debates in the philosophy of language. Simply put, it concerns itself with the production and interpretation of meaning in context. We all know that when we say something there is the semantic meaning and an extra meaning. An irony is a good example. That is part of what concerns pragmatics; under what conditions and which rules govern the production and interpretation of that extra-meaning.

The idea of maximizing information, cooperation or relevance are some of the principles that academics from that field have come up with to comprehend such production of meaning. This somewhat extravagant detour also has a meaning. This paper has praised "voice" as a corrective mechanism when public goods deteriorate. Yet "voice" will not always produce meaning that is adequately interpreted by those who are listening.

What's more problematic, sometimes a conversation becomes a "dialogue of deaf people" since no one is actually guiding their utterances or interpretative efforts by cooperative or relevantist principles. The Uruguay of the sixties and seventies, did not lack "voice", the problem was the quality of the "voice" being produced, and the predisposition of those engaged in communicative action.

In other words the problem was not the absence of voice but of communication. Pragmatics is carefull enough to distinguish act of speech from actual communication.

Communication, by definition, is a process by which those that engage in it modify in the process their perceptions and cognitive world. More specifically: "communication presupposes achievement of the intended effect of verbal communication upon the addressee, whereas speaking and writing do not".

Pragmatics refers to "unhappy acts of speech" in which cases communication is not achieved. More often than not, such unhappy acts are due to the absence of a shared context that allows those engaged in speech to decodify and interpret meanings that go beyond simple semantic rules. Institutionalized democratic political systems, are important precisely for that reason.

They provide actors with shared contexts that in turn permit them to engage in communication and thus change their perceptions, positions and preferences in the political arena. Uruguay, can be said to have an institutionalized political system, and in that sense a cautious optimistic response to the threat treated above can be advanced.

Uruguay is, not out of the woods yet. The two most important reforms are still unfolding, and the other areas of social policy and labor market policies that successfully faced what seemed to be an irreversible process of deterioration, still have to confront the challenge of reform.

Furthermore, while overall indicators of social development have shown improvement, other less standardized evidence suggest that important problems lay ahead. True ghettos are a reality in urban Uruguay
(Kaztman, 1996), the number of single mothers continue an upward trend, families have lost part of their integrative capacity (Filgueira, C. 1996), and unemployment and underemployment have increased in the last two years.

Finally, Uruguay received 150.000.000 dollars for the social security transition period, 140.000.000 for the education reform, 58.000.000 for the PRIS-FAS experience, and additional funds for a health reform that never developed. These loans will have to be paid, and those shaping "voice" might not be aware now, but will certainly be later.



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