Safety Nets and Opportunity Ropes: Rethinking social policies in LAC after the “Great Recession”

1. Safety Nets and Opportunity Ropes:Rethinking social policies in LAC after the “Great Recession” Francisco H. G. Ferreira Deputy Regional Chief Economist, LAC The World Bank IDB Seminar, September 10-11, 2009

2. Social policy: objectives and instruments • To assist individuals in managing risks (Because insurance markets are imperfect.) • Health • Longevity • Employment • Weather • To redistribute (income, “merit goods”, opportunities…) • In pursuit of “equity” or “poverty reduction” • But also because credit markets are imperfect. • Instruments • Education • Health • Labor market programs and regulations • Social Security • Social Assistance

3. Public social expenditures around the world: Wagner’s Law in the cross section Source: Elaborated by Carlos Prada, using World Development Indicators (2008) data. Public spending figures comprise health and education only.

4. Recent trends in social expenditure: 1990 - 2005 Source: Elaboration by Carlos Prada, with data from ECLAC and World Development Indicators, 2008. Note: LAC Includes Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Mexico, Panama, Paraguay, Peru, Uruguay, Venezuela RB. Social Security excludes Social Assistance (as far as we can tell).

5. The traditional problem: a “truncated” welfare state. “The provision of social insurance in LAC is based on a contributory system (Bismarckian system). Workers in the formal sector make contributions via payroll taxes in return for the promise of a set of benefits that include pensions, health insurance, insurance against professional risks (work-related disability), etc. By virtue of this arrangement, coverage of welfare systems is determined by the nature of the labor contract. On one hand, a segment of population comprised of formal employers and employees enjoys coverage of a relatively generous and multidimensional package of social benefits. On the other hand, there is a group of individuals either in the informal sector or unemployed that have a much more limited access to formal and comprehensive social risk management strategies.” Source: World Bank (2009): Social Protection for the 21st Century: How can Latin America and the Caribbean extend effective social protection to all its citizens? (Robalino, Ribe and Walker).

6. Figure 1.2: Contributory Pension Coverage in Latin America and the Caribbean, 1990s to 2000s[1] (Percent of economically active population contributing to pension systems) Source: World Bank (2009): Social Protection for the 21st Century: How can Latin America and the Caribbean extend effective social protection to all its citizens? (Robalino, Ribe and Walker).

7. Pension Coverage by quintile of per capita income - 2000s Low coverage rates were compounded by regressive incidence Source: World Bank (2009): Social Protection for the 21st Century: How can Latin America and the Caribbean extend effective social protection to all its citizens? (Robalino, Ribe and Walker).

8. Contributory Health Insurance Coverage by Decile of Per Capita Income The same pattern holds for contributory health insurance coverage in most countries. Source: World Bank (2009): Social Protection for the 21st Century: How can Latin America and the Caribbean extend effective social protection to all its citizens? (Robalino, Ribe and Walker).

9. Pension Coverage by Income quintiles Non-contributory pensions Both contributory and non-contributory pensions Contributory pensions The great success of the last ten-fifteen years (in some countries) has been the expansion of a non-contributory complement to truncated social security, under the rubric of social assistance. Source: World Bank (2009): Social Protection for the 21st Century: How can Latin America and the Caribbean extend effective social protection to all its citizens? (Robalino, Ribe and Walker).

10. CCTs have been a prominent part of this revolution. But not the only one and, in many cases, not the quantitatively most important. Source: Fiszbein and Schady (2009): Conditional Cash Transfers: Reducing Present and Future Poverty (Washington, DC: The World Bank)

11. Growth in NCT expenditures: The example of Brazil (i) Source: Ferreira, Leite and Ravallion, JDE forthcoming.

12. Growth in NCT expenditures: The example of Brazil (ii) Source: Ferreira, Leite, and Ravallion, JDE forthcoming.

13. Three questions and two challenges • The expansion of reasonably well-targeted social assistance to the poor has been a major success in LAC. • Has contributed to poverty and inequality reduction. • At relatively low cost. • But is the resulting system coherent and efficient? • Is the rate of expansion sustainable? • And is it the (only) kind of redistribution we want? • Two challenges going forward: • Integrate the contributory and non-contributory parts, minding the incentives to informality (S. Levy, 2008) • Complement redistribution of incomes with a greater amount of redistribution of opportunities.

14. Inequality of opportunity in Latin AmericaAn illustration: distributions of per capita consumption conditional on mother’s educational attainment in five Latin American countries. Source: Ferreira and Gignoux, 2008.

15. Inequality of opportunity is built up from very early on in the lifecycle… Cognitive test performance by children in Ecuador by wealth quartiles by maternal education Source: Paxson and Schady, JHR, 2006

16. …but it does respond to policies. Mental development of undersized children (low height for age):The Jamaican Study Source: Grantham-McGregor et al., 1991.

17. Conclusions • The challenges are: • To retain income redistribution (or introduce it, where it hasn’t been implemented yet) through smart social assistance, but funded so as to prevent further segmentation of the economy. • Implies a pretty radical reform of social security (and health) financing. • Lower contributions with higher taxes? Lower spending elsewhere? • To enhance the distribution of opportunities, by targeting: • ECD • School quality interventions • Health and nutrition interventions • Microfinance interventions to the opportunity-deprived.

18. Conclusions • And we can easily locate the opportunity-deprived. Brazil’s “opportunity-deprivation profile” in 1996: six poorest “social types” (adding up to 10% of the population), defined by pre-determined background characteristics. Source: Ferreira and Gignoux, 2008