Chile: Social Equity

 
By Inke Fabian
 

The new theoretical background
 

In the Nineties, important theorists proclaimed to stop the common thinking in antagonisms like "laissez-faire versus dirigisme" or "structuralism versus monetarism". (Rosenthal 1996: 8) Adjustment and stabilisation had been approached at extremely high social costs. It then partly was the East Asian experience which taught to include the pursuit of macroeconomic stability, recognition for greater investment in human resources, acknowledgement of the need to increase domestic financial saving and adoption of greater export orientation. As a result, market-based policies have yet been put under revisionism. It can be stated a shift from the emphasis of short-term macroeconomic engagement to medium-term engagement.
 

The new CEPAL approach: Neostructuralism

In 1991, the CEPAL presented a new concept called "Transformación productiva con equidad" which deals with the transformation of production patterns with social equity. Social aspects constitute a substantial part of the approach itself.
The elements that had to be considered and to be put together were macroeconomic stability, growth, democracy and equity. The CEPAL thinkers saw the necessity of a transformation obtaining efficiency, democratic structures, equity and technological progress at the same time. So an important element of this thesis is the orientation towards a model of development conducive to social cohesion and the strengthening of democratic political processes. (Faletto 1993: 203.)

 
A different neoliberal thinking?

 In the concept we can state either a coherence, either a rupture with the neoliberal thinking. Integration into international economy and competitiveness on the international market are clearly neoliberal elements. The integrative CEPAL approach includes simultaneous growth and equity. The objectives are to reduce poverty, provide equal chances and an equal distribution of profits. These clearly liberal ideas were responsible that conservatives in Chile did agree to this concept.

The objective of the CEPAL proposal consists in producing – within the neoliberal pattern – an efficient, durable and international competitive economy which at the same time establishes democratic structures and equity. (Müller-Plantenberg 1993: 24) So a combination of orthodoxy and heterodoxy takes place: in form of a combination of stable and coherent macroeconomic management with a new form of State intervention at the micro- and meso-economic level. (Rosenthal 1996: 17) The orthodox element is the relative State activism: more selective policy interventions at the macroeconomic level in order to achieve specific objectives, such as attaining international competitiveness, maintaining price stability and achieving greater equity.

 
Growth and equity: compatible or not?

Faletto points out, that "it had to be taken into account that socio-economic conflict was an almost inevitable part of the very process of economic development" (Faletto 1993: 195) So the most important task of the government in Latin America consists in improving equity. (Rosenthal 1996:18) The increasing disparities between the different segments of the population have a great impact on political interaction in more pluralistic societies. Rosenthal is optimistic that a progress concerning increased equity can be achieved, because population growth rates are declining, more attention to education is given (p.ex.in Chile), the consolidation of democratic and participative political systems is encouraged, as well as a public sector reform, with the State playing a more active role.

In neoliberal thinking it is considered necessary to attain growth first and only then (perhaps) equity. A common conception also was to sacrifice growth in favour of a better distribution of the profits of the economic progress (Ramos 1995:14), and like this, social policy was made responsible for compensating or correcting the regressive effects of some economic policies, which in fact is impossible to achieve.

The CEPAL adopted an integrated approach in which economic policy pursues the objective of equity as well and simultaneously as that of growth. Social policy should give high priority not only to equity but also to efficiency. Like this, the complementary aspects of growth and equity are heightened, while possible areas of conflict are minimised. (Ramos 1995: 14)

Ramos clearly sees a possibility in achieving growth with equity. In his opinion, there is no inevitable conflict between these two goals, provided that the economic policy promotes the areas of complementarity between growth and equity. (Ramos 1995: 13)
Necessary are
a) maintenance of the macroeconomic balances (against inflation)
b) investment in human resources (to promote education)
c) policy of full employment in productive activities (not only temporary or low-productivity employment)
d) necessity of a rapid, large-scale spread of technology to rise productivity and modernize to increase employment and to integrate the national economy in the world market
 
It is shown that growth with equity is possible, but does not take place automatically.

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Discrepances between growth and equity: the instruments

The new aspect of the CEPAL approach is concerning the instruments of providing growth and equity. (Müller-Plantenberg 1993: 29) Increase of productivity by promoting education and knowledge is an objective which goes beyond the neoliberal pattern, because the state is supposed to intervene in areas where the market fails. (Müller-Plantenberg 1993: 31)

Concerning the instrument which is used, discrepancies between the objectives of growth and equity may arise. To reduce the deficit, p.ex., one can either reduce public expenditure or increase revenue. The outcome depends on the measure which is used to eliminate the deficit. Cutting expenditure will lead to reduce the functions of the public sector in terms of investment in infrastructure and human resources. So CEPAL would propose an increase of tax revenue in form of replacing an implicit tax with an explicit. Like this, inflation would be held down and an increase of the net effective tax burden is avoided. Further, a reduction of tax evasion and to simplify the tax system would be appropriate.
Ramos still gives more examples how to decide in favour of equity concerning private savings, a better use of investment and labour, the expansion of markets and technological development. He shows that only more active instruments will make it possible to overcome the key obstacles in the sectors of physical and human capital, labour, technology and foreign exchange. The role of the State has to be changed deeply while the degree of State activity has to be measured by its real capacity to take action and to do so efficiently. (Ramos 1995: 24)

 
The role of the State

"The State is obliged to assume new functions or to play a more active role than it had done traditionally. Urgent social programmes were needed, since the traditional structure of society was undergoing a process of profound change and readjustment." (Faletto 1993: 195).
In this quotation, the instrumental differences between the ECLAC´s neostructural and the neoliberal approach become clear: While neoliberalists give priority to deregulation and liberalisation of markets and plead for a sort of passive role for the State, the ECLAC proposes a selective action by the State including that growth can be attained with equity. The State should be regarded as having the function of promoting processes rather than merely correcting faults and inefficiencies. (Faletto 1993: 195)
Even if the market is still seen as a place where the biggest efficiency of allocation of the resources is given, the concept does not affirm a minimalistic state, but active intervention.
International competitiveness shall be envisaged by medium and long-term development including selective intervention help for certain sectors.

The Chilean experience
 

Priority of macroeconomic stability

The democratic transition in Chile is characterised by a great coherence to the military dictatorship concerning its economic organisation. The first democratic elected president Aylwin did not attempt to change the economic system. He inherited and kept an open economy and a capitalist strategy with limited State action. This context surely was favourable to growth with stability: the macroeconomic balances were under control, inflation was held low and the fiscal accounts were balanced. So a broad consensus among Chilean decision makers about the hegemony of the neoliberal view can be stated.
The social spending remained repressed under military dictatorship, an enormous gap between growth and social equalities was created by exclusionary or inefficient social policies. (Vergara 1994: 245) Income distribution had become even more regressive (Vergara 1994: 247)

Would it be possible to consolidate democracy and simultaneously reconcile the objectives of growth and equity in the context of an open and export-orientated capitalist economy and a dualistic social welfare system?

Not only the need for macroeconomic balances is inherited from the Pinochet regime, but also political-institutional restrictions like the autonomy of the Central Bank in controlling monetary and exchange policies, the armed forces retaining significant prerogatives and
employers pushing for deepening the free market strategy, for deepening privatisation initiatives and opposing new taxation for social programs. (Vergara 1994: 248)

 
Priority of growth or promoting growth and equity simultaneously?

As stated, the disparities were incompatible with the efforts to consolidate democratic institutions. In spite of the adverse context, the Aylwin government adopted distributive proposals which depended on a concerted strategy among the political, economic and social actors. With the proposals "equity, solidarity, integrity and social participation", the government wanted to show its intention to break with the social development strategy of the previous military regime, at least inside the political discourse.

By a tax reform sufficient resources for the development of an efficient and progressive social spending policy should be allocated. (Vergara 1994: 248) It in fact achieved to stop the steady erosion in real salaries, but the undeniable distributive impact did not benefit all segments of society, but went mostly to the group of organised workers. The resources gained from the tax reform were used to increase social spending without provoking macroeconomic imbalances. They went primarily to increase subsidies for low-income groups.

The democratic government retained another fundamental pillar of the military regime’s social policy: the social safety for the very poor. It can be stated an expansion of some subsidies, for example by the introduction of the FOSIS (Fondo de Solidaridad e Inversión Social) which was created to finance projects that benefit the neediest groups and complements traditional social policies. But these resources are fairly insignificant, representing less than 1% of GDP.
The problem of the pension insurance fund is that "become older is become poorer". (Yanez 1996: 214) and that a competition between the old public and the new private pension funds has been opened, abandoning the concept of redistribution. Only the principle of equivalence is maintained so that contributions correspond benefits. (Nolte 1991: 23)

So one can conclude that under Aylwin, preoccupation with equity remains relegated to compensatory programs directed towards extreme poverty. Characteristic to the Chilean social system is further its dualistic strategy of social development. This means on the one hand access to a high-quality system of private services, on the other hand perpetuating dependence on state assistance for many who remain excluded from the market. Social policies are so limited to charity, only focus on immediate consumption, with few resources destined to increase the country’s productive capacity.
Like this, Chilean social policies only serve to accentuate the contradiction between the objectives of growth and equity ( Vergara 1994: 251) It is shown that economic growth is necessary, but not sufficient for overcoming poverty in Chile. To reach equity, this task should become a political long-term objective and should not be restricted to political discourse.

Mármora talks about a consensus in the poor Chilean class about growth being necessary. Does growth seem to be accepted as prioritary? Can we say that people accept social inequality to a certain degree in order not to endanger growth? (Mármora 1991: 64/5)

 
Consolidation of Democracy through equity

In the context of the consolidation of democracy in Chile, Vergara states that: "There is no example in the world of successful growth sustained by massive poverty." (Vergara 1994: 253) The provision of universal basic benefits is, according to her, crucial to the consolidation of democracy. (Vergara 1994: 255) Calderón states that an emphasis on the social dimension is necessary to secure the access of Chilean products to the European market. (Calderón 1991: 106.)
In order to attain equity and consolidate democracy it will be necessary to modify the current administrative structures. That means making the mechanisms of public administration more agile, decentralise decision making and redefine the responsibilities of the public apparatus, the private sector and the civil society in providing basic social services. In other words, the state’s ability to direct the development process according to its criteria and priorities must be restored. Because growth of productivity and increase of economic efficiency are the bases for social progress, the new social policy must be linked to the modernising rate velocity of the economy. (Mármora 1991: 65)

As it was shown that in the case of the new CEPAL concept and the Chilean economic and social policies, the old neoliberal model has not been completely abandoned, but its old framework is used to create a new approach. Can Chile be seen as a model-State of the new CEPAL concept? Or did the concept orientate on the Chilean case? Could Chile serve as an example for other countries?

Bibliography:

Faletto, Enzo 1996: ECLAC and the sociology of development, in: CEPAL Review 58, p. 191- 205.

Lahera, Eugenio/ Ottone, Ernesto/ Rosales, Osvaldo 1995: A summary of the ECLAC proposal, in: CEPAL Review 55, p. 7- 25.

Mármora, Leopoldo/ Messner, Dirk 1991: Chile im lateinamerikanischen Kontext- Ein Modell für Demokratisierung und Entwicklung in der gesamten Region?, in: Ensignia, Jaime/ Nolte, Detlef: Modellfall Chile? Ein Jahr nach den demokratischen Neuanfang, Münster/ Hamburg, p. 43- 69.

Müller-Plantenberg, Urs 1993: Die CEPAL und der Neoliberalismus, in: Dirrmoser, Dietmar (Hg.): Markt in den Köpfen, Lateinamerika. Analysen und Berichte No. 17, p. 17- 35.

Nolte, Detlef 1991: Modellfall Chile? Die Bilanz nach einem Regierungsjahr, in: Ensignia, Jaime/ Nolte, Detlef: Modellfall Chile? Ein Jahr nach dem demokratischen Neuanfang, Münster/Hamburg, p. 15- 42.

Ramos, Joseph 1995: Can growth and equity go hand in hand?, in: CEPAL Review 56, p. 13- 24.

Rosenthal, Gert 1996: Development thinking and policies: the way ahead, in: CEPAL Review 60, p. 7- 19.

Vergara, Pilar 1994: Market Economy, Social Welfare, and Democratic Consolidation in Chile, in: Smith, William C. et.al.: Democracy, Markets and Structural Reform in Latin America, p. 237- 258.

Yanez, Eugenio 1996: Die soziale Marktwirtschaft als Option für die Armen in Chile, Osnabrück, Rasch.