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Neoliberal Social Policy: Managing Poverty (Somehow)

By Carlos Vilas, in NACLA Report on the Americas, 19 June 1996

Carlos Vilas is a sociologist and historian at the National Autonomous University of Mexico (UNAM), and a member of NACLA's editorial board. The debt crisis of the early 1980s and the macroeconomic adjustment and neoliberal reforms that the region's governments implemented to deal with it resulted in a dramatic increase in the number of people living in poverty. In 1980, 118 million Latin Americans--about a third of the region's total population--were poor. By 1990, that number had increased to 196 million, or nearly half the total population. Eighty percent of these 78 million "new poor" live in cities, which helps explain the congestion and deterioration of many Latin American capitals.1 This 42% growth rate of the "new poor" between 1980 and 1990 was almost double the 22% population growth rate in the region during the same period.

This veritable process of poverty production contrasts sharply with socioeconomic trends of the preceding decades. The proportion of poor people within the overall population in Latin America fell from 51% in 1960 to 33% in 1980. During this 20-year period, the number of poor people increased by 9 million, or 8%, while the total population grew by 145 million, or 67%. This drop in the percentage of poor people was obtained without programs designed to "combat poverty." It was, rather, the result of the overall functioning of the economy, which integrated large segments of the population by creating new jobs, and helped to progressively distribute income through business-labor negotiations regulated by the state.

Latin America's economy began to rebound from the economic recession in the mid-1980s. Gross domestic product (GDP) grew 9.5% between 1986 and 1990, and another 15% between 1991 and 1995.2 As poverty levels remained constant or increased despite economic growth, it became clear that structural adjustment does not by itself reduce poverty and macroeconomic recovery does not translate into significant social improvement. This provoked alarm among governments and the multilateral lending institutions like the World Bank and the Inter-American Development Bank (IDB) that were advising them on how to implement the adjustment measures. They saw this burgeoning poverty as a source of political instability, and as fertile terrain for demagogues and populists that might threaten the neoliberal restructuring process. As a result, these agencies began to emphasize the need to create programs to combat poverty.

In this way, social policy entered into the neoliberal reform agenda as a question of poverty and, in fact, was reduced to that. Neoliberalism considers the growth of poverty to be a pathology, not a consequence of the economic system. Hence it isolates poverty from the process of capital accumulation and economic development, and reduces the solution to designing specific social policies.

Any social policy performs two essential functions. First, it supports the process of capital accumulation through the social reproduction of the labor force. Second, it legitimizes the overall political order by offering social services that help create consensus among the population that benefits from them. The way in which these two functions are performed depends on the political and social dynamics of each country. Social policy is an arena of social and political conflict among social groups, whose outcome is expressed in government decisions.

Over the past decade, the passage from a Keynesian-Fordist model of economic development to a neoliberal one has had significant repercussions on the nature of social policy in Latin America. In the Keynesian-Fordist model, the state regulated economic activity and intervened in specific sectors, including the establishment of state-owned enterprises. Increases in economic productivity led to salary increases and expanded employment which benefited the population as a whole.

Social policy in this model reinforced the process of capital accumulation to the degree that it created externalities for private enterprises.3 For example, public investment in education, health care, worker training, and low-income housing represented a savings for the private sector, which would otherwise have had to invest in these areas. Meanwhile, employment, wage and pricing policies improved the purchasing power of individual workers and the domestic market as a whole. Social policy was seen as an element of investment, not an expense. Both economic and social policies in the Keynesian-Fordist model facilitated the incorporation of broad sectors of the poor, especially the urban poor, into the political and economic system.

Latin America during this period was characterized by widespread social mobility, stimulated--within certain limits--by the state. Together these varied elements helped constitute what was known as the "national-popular state," or the "national-developmentalist state"--the Latin American proxy of the western European "welfare state." Social policies contributed to capitalist development, were reformist by nature, and fed social mobility, which gave the political system broad legitimacy. Citizen rights were thus imbued with socioeconomic rights. Citizen rights were also expanded into the political realm, as women and indigenous people were granted the right to vote. The implicit paradigm of social policy--and of state policies in general--was integration.4

With variations from country to country, the Keynesian- Fordist model peaked between the 1930s and 1970s. It entered into crisis because of changes in the international system since the 1950s, increasing divergence between business interests and labor demands, and recurring fiscal crises. Military dictatorships, authoritarianism, and later, the debt crisis that detonated in 1982, led to the exhaustion of this model of development and its social policies.

Recognizing the limitations and inefficiencies of the Keynesian-Fordist model should not lead us to minimize its successes. The integrating dynamic of this model reduced poverty by moving labor from low-productivity activities to modern ones, improving employment levels and the quality of jobs, increasing disposable income through wage hikes and price subsidies for urban workers, and redistributive state social policies.

The crisis of the 1980s created the conditions for the application of the neoliberal model. This model is characterized by the deregulation of the economy, trade liberalization, the dismantling of the public sector, and the predominance of the financial sector of the economy from production and commerce. The state has abandoned its role as an agent of social development and integration. Instead, it helps define winners and losers in the marketplace by setting the exchange rate, interest rates and tax policy, all of which pump income toward the financial sector.

Social policy is reduced to a limited series of measures intended to compensate the initial negative effects of structural adjustment among certain sectors of the population. These negative effects, neoliberal policy makers purport, are rooted in the irrationality of the previous system's distribution of resources. Social policy is considered transitory: after an initial painful phase, structural adjustment will reestablish basic macroeconomic equilibrium and promote economic growth without inflation. New jobs will be created within the modern sector of the economy--the "trickle-down" effect--which will raise incomes and leave only a small proportion of the population in need of public attention.

As a matter of principle, neoliberal economics does not concern itself with social policy. A strong economy, it is argued, will make permanent social policies unnecessary. Social issues are considered a government expense, not an investment; the concept of social development gives way to that of social compensation. With the drastic cuts in social spending, however, only minimal compensatory mechanisms can be sustained. As a result, social policy has contracted, and its two traditional functions--accumulation and legitimization--have experienced severe adaptations.

Neoliberal social policy helps promote capital accumulation through financial maneuvers. For example, the privatization of the retirement and pension systems in many Latin American countries handed over huge financial resources to the private capital market, thereby stimulating capital accumulation. For their part, social-investment funds promote capital accumulation by supporting small-business activities like repair shops and industrial homework enterprises.

For the rest, neoliberal social policy operates like a charity, directing aid toward the extremely poor. Rather than improving the working and living conditions of low-income groups, social policy tries to assist the many victims of structural adjustment, and to prevent further deterioration in the living standards of the population already below the poverty line. Neoliberal social policy doesn't help these people get out of the hole of poverty; it simply tries to prevent them from sinking further into it.

These characteristics of neoliberal social policy severely limit its capacity to fulfill a legitimizing function for the political system. In fact, social policy is essentially reduced to putting out fires so that situations of extreme social tension do not become larger political problems. Neoliberals fear that such problems would create a climate of instability that might negatively affect the inflows of foreign capital, putting the whole economic model at risk. In this sense, social policy becomes closely linked to the politics of the moment. On the eve of the 1994 presidential elections in Mexico, for example, the government of Carlos Salinas poured huge sums of money into "Procampo," a new program to provide temporary relief to the rural poor. The implicit objective of the Mexican social-investment fund, Pronasol, was to reduce the level of political conflict in those parts of the country where the opposition could gain ground.5

Central America's health-sector reform dramatically illustrates the internal tensions and contradictions of neoliberal social policies in poverty-stricken countries. Although Central American governments began discussing the need to reform the health sector in the late 1980s, the recent adoption of health reform was prompted by loans offered by the World Bank and the IDB. These loans were granted only on the condition that governments implement broader public-sector reform. The development banks' concern with health reform reflects their wider interest in macroeconomic adjustment and state deregulation. The scope and content of reform in the health sector are tailored to the overall goals of neoliberal reform.

Since macroeconomic reform usually involves sharp cuts in already meager public spending on infrastructure and social services, the impact of health reform is ambivalent and even contradictory. In Nicaragua, for example, public spending on health dropped from 5% of GDP in 1990 to 4.4% in 1994. Today the government spends an average of $19 per person a year on health services, or $1.50 per person per month. The figures for Guatemala are even worse. Public health expenditures dropped from 1.5% of GDP in 1980 to 0.9% in 1990, climbing to just over 1.3% in 1993. Costa Rica, on the other hand, spent 7.5% of its GDP on public health in 1993, an average of $60 per person.6 Efficiency, cost-cutting, and better managerial skills--all of which are all urgently needed in Central America--are emphasized. Yet, efficiency is undermined by budget cuts reducing the impact of policies and actions. Cost-cutting is urged upon countries that already devote meager resources to health and other social services. The emphasis on management skills and techniques is abstract, and frequently bears little relation to the specific character and needs of the health sector.

Most health ministries in Central America face increasing shortages in infrastructure, equipment and personnel-- shortages that cannot be offset by the "self-management" of civil society in countries in which the overwhelming majority of the population is poor. In recent years, greater emphasis has been placed on improved training for health-care specialists, but low salaries and poor working conditions jeopardize efforts to recruit and retain skilled personnel. Since health is not--despite the rhetoric--a priority for most Central American governments, high turnover of personnel in top-level positions in health ministries reinforces the lack of continuity and the loose commitment to health-care reform.

Within this general framework, differences exist among countries. In Costa Rica, health-care reform is more independent from the multilateral lending agencies. Even as reform takes the shape that these agencies favor, the notion of health as a social service has been preserved. By contrast, in the health-reform program designed by the IDB in Guatemala, the Ministry of Health must get explicit IDB approval for 43 out of 63 components of the program in order to move to the next step and have funds disbursed.7

Neoliberal social policy has three basic characteristics, which are tightly interwoven: privatization, targeting, and decentralization. Privatizing social services is considered a way to alleviate the fiscal crisis, to make service delivery more efficient, and to avoid the micro- and macroeconomic distortions that arise from free public services. Users' fees have been imposed or increased, and new operating principles based on the criteria of business and commercial profit have been introduced. These have had significant repercussions on the quality and breadth of coverage. Users' fees, it is argued, are a way of reducing the financial burden assumed by lending agencies. They are also supposedly a way of ensuring that public services will be used only by those who really need them, avoiding the waste of resources.

Privatization implies the abandonment of the notion of public service, and its replacement with that of a business out to make a profit. Access to social services is no longer considered one's right as a citizen, but is based on one's ability to pay. The privatization of social services generates new social inequalities because only wealthier groups can now afford them. This explains the resistance to privatization from broad sectors of the lower and middle classes who believe that they have a right to health care and education. In Argentina, for example, low-income salaried workers lost access to medical attention when the social- security system was privatized. As a result, these workers are forced to rely on the public health system, which is already overwhelmed. In a domino effect, the poorest of the poor have ended up excluded from public hospitals. Making matters worse, after problems in his economic program became apparent last year, President Carlos Menem and his minister of economics, Domingo Cavallo, ordered further cuts in social spending. As a result, several public hospitals in Buenos Aires have been forced to close, leaving thousands of people completely without access to basic medical care.

Privatization also entails the loss or reduction of state financing for projects once run by the government as a function of its role as representative of the public interest. In El Salvador, for example, the government delegated to the Business Foundation for Educational Development (FEPADE), a business-oriented think tank, several important worker-training programs for ex-combatants from the Farabundo Marti National Liberation Front (FMLN) and demobilized members of the armed forces. The program was designed by FEPADE, and financed with foreign funds.

The efficiency of the privatization process usually depends on the state's regulatory capacity. In Latin America today, however, the state has abdicated this function, paving the way for the formation or consolidation of oligopolies in the health, education, and social-security markets. As a result, social policy becomes shaped in ways amenable to particular groups and special interests that can exert the most pressure. In the case of the health sector, for example, medical laboratories, large private clinics, and professional organizations have gained significant influence. In housing policy, construction companies and banks have become major players.

With privatization, health and education are no longer rights. They are luxuries or, at least, pieces of merchandise to be bought and sold in the marketplace. If you cannot afford the merchandise, don't buy it. In other words, if you can't afford medical care, die. If you can't pay for education, stay illiterate and sell chewing gum on the street corner. The privatization of pensions in Bolivia illustrates this logic with particular cruelty: the government set the age to begin to "enjoy" retirement benefits almost ten years higher than the life expectancy of the average Bolivian.

The second principal tenet of neoliberal social policy is targeting. Given the contraction of funds assigned to social policy, targeting is promoted as a way to guarantee that resources effectively reach those to whom they are directed. The arguments in favor of targeting echo the criticisms of the Keynesian-Fordist model. That model was based on the principle of universal, free social services. Neoliberals argue that the model benefited workers in the urban wage- labor force and the middle classes, but did not reach the poorest of the poor--the rural poor and the informal sector. Targeted social programs, specifically designed to reach the neediest, impose new management practices and efficiency criteria on state social policy. Clearly however, targeting responds less to the supposed inefficiencies of the Keynesian-Fordist social-security model, than to the need to respond to mounting social problems with scarce resources.

In theory, targeting aims to fulfill a basic requirement of any public policy: reaching the intended constituency, and optimizing the use of resources. The first obstacle is defining the beneficiary group given the magnitude of needs. This process normally involves much more than a technical breakdown of the population according to particular statistical indicators. Who benefits from these special programs is the outcome of a complex interplay of pressures and competition among potential beneficiary groups. In this sense, targeting is highly sensitive to struggles over income redistribution, which grow more acute as the economic crisis deepens and resources become scarcer. These programs are also used as patronage tools to create and maintain clientelistic relationships. In the same way, targeting is open to bureaucratic or political manipulation for electoral purposes.

Experience shows that it is extremely difficult to redirect resources that used to go to the middle class toward the poorest. In general, the poor exert little pressure, either because of their lack of experience or their sheer vulnerability. Moreover, it is middle-class professionals, not the poor, who design the projects. In Bolivia, for example, the Social Emergency Fund (FSE) did not reach the poorest Bolivians, since they are not the ones who most vocally and visibly demand resources. The majority of the projects were carried out in the wealthier or relatively less-impoverished areas, since there was little demand for funding from groups in the poorest regions of the country. Targeting may in fact aggravate inequality, since targeted programs can improve the situation of one particular community while others languish in poverty. In the end, the desire to keep people who are not poor from receiving benefits often results in the exclusion of many of the poor.

Targeting frequently puts a heavy burden on women. Especially with targeted community-based programs such as food supplements, the social policies rely on the direct involvement of women. Women can gain important organizing experience by participating in these programs, which have the potential to become the basis for a truly participatory social policy. At the same time, they make women's workload heavier. As unpaid female labor grows, gender inequality is reinforced.8

But above all, the neoliberal approach to fighting poverty has proven incapable of answering a fundamental question: What does the notion of target groups mean when 60 to 80% of the population lives below the poverty line, either because of the impact of structural reform or for pre-existing or other reasons?

The final basic tenet of neoliberal social policy is decentralization. Neoliberals criticize the Keynesian-Fordist model for being too centralized. They argue that decisions concerning social policy should be assumed by lower echelons of government such as provinces or municipalities, and eventually by the local organizations of the affected population and other NGOs.

Decentralization can give people a sense of the importance of working together to directly confront their problems. It encourages the development of local leadership and gives poor people training in management practices. The Oramento Participativo--the participatory budget--under the municipal administrations of the Workers' Party in Brazil is an example of genuine decentralization of social policy. Citizens participate directly in the decision-making process both in terms of defining government policies and determining how money is spent. This experience, however, belongs to a specific political project that is completely at odds with neoliberalism.

Up to now, decentralization in the neoliberal context has focused on program implementation, not program design. This amounts to functional decentralization--also referred to as "deconcentration"--but not political decentralization. This lack of political decentralization lends credence to the hypothesis that the objective of decentralization is not the democratization of social programs and policies, but rather achieving greater efficiency from scarce resources.

Making the transition from a highly centralized system to a decentralized one is complex and takes time. This is particularly true when the centralized structures have been around for more than a century and have become part of the mindset of the actors. One of the problems facing the decentralization process--including the operative kind--is the inability of actors at the local level to assume the tasks delegated to them. Virtually overnight, for example, municipalities have found themselves responsible for providing a gamut of social services without the necessary financial, human, administrative, and material resources. This often translates into inefficiency--at least initially-- in service delivery, the deterioration in the quality of services, and the emergence of multiple entities that perform functions that used to be the responsibility of a single institution.

While it is true that grassroots participation in social- policy implementation is greater in local structures than in the centralized entities that were usually far away and bureaucratic, not all sectors of society get involved. Participation is the result of an array of factors that are normally absent, or exist to a lesser degree, in the neediest social groups: organizing capacity, a sense of efficacy, and basic education. Without the presence of a central state with the political will to correct inequalities, decentralization ends up leaving out the weakest social groups.

Criticism of the inefficiencies of the Keynesian-Fordist social policy points to its limitations and uneven reach, but doesn't improve the results of neoliberal social policy. Even if we evaluate neoliberal social policy only in the limited sense of combating poverty, the results after a decade of neoliberalism are scarce. The majority of the poverty- alleviation programs represent a new form of relating with the poor, which hasn't translated into a significant reduction in overall poverty.

Until now, neoliberal social programs have shown the capability to reduce the number of people living in extreme poverty. Emergency employment programs, food subsidies and the like can effectively attend to extreme needs. Rising out of poverty, however, is a much more complicated process that depends on a diverse set of economic, financial, political and institutional factors that go far beyond social policies.

All models of capital accumulation assume a given portion of "surplus population"--in other words, people who look for work, but don't find it.9 Since neoliberalism privileges the financial sector of the economy over the productive one, it presumes a much larger portion of surplus population than the Keynesian-Fordist model of the past. In this context, one can expect little of neoliberal social policy, regardless of its technical merits.

Simply put, neoliberalism marginalizes and expels people at a greater rate than these programs can compensate. The case of Mexico is especially illustrative of the tension between the technical efficiency of a particular sectoral policy and the logic driving the overall economic model. While Pronasol, Salinas' poverty-alleviation program, succeeded in reducing the number of extremely poor Mexicans by 1.3 million between 1989 and 1992, the very same number of people lost jobs in the industrial sector of the economy between 1988 and 1992.10

This kind of juxtaposition highlights the inability of targeting to have any significant impact given the profound social inequalities that the economic system generates. In Chile in 1970, for example, only 17% of households were poor; in 1989, after almost two decades of neoliberalism and dictatorship, poor households represented 38.1%.11 In 1995, the richest 20% of Chilean households earned 18 times the income of the poorest 20%. Chile, praised as a neoliberal success story, now has the fifth worst income distribution in the region.12

Overall neoliberal economic reform defines the possibilities and limitations of the new social policy much more than the technical limitations of the programs themselves or the "errors of the past." For example, this year Mexico will have to make more than $32 billion in payments on its debt to foreign creditors, which equals 35-40% of the total value of its exports. In such circumstances, there isn't much money left over to fight poverty or to promote social development.

The neoliberal hypothesis that economic growth ultimately generates increased employment and lessens poverty doesn't hold up against the facts. The passage from economic crisis to economic recovery has not produced substantial social improvements. The increase in productivity and economic output have not generated corresponding increases in employment levels and working conditions. Employment, when it expands, does not keep pace with population growth. Real wages remain depressed as well. The biggest surge in employment is taking place in the informal sector, which offers work that is precarious and low-paying. Of the 15.7 million jobs created in all of Latin America over the last five years, 13.6 million of those came from the informal sector.13

Faced with the rigidities of the free market and the bias of public policies, there is little that neoliberal social policy can accomplish with respect to legitimation of the social order either. Job insecurity, violence, urban congestion, rising common crime and growing social inequality are products of the crisis of the 1980s and the social and economic policies adopted to confront that crisis. The economic recovery that followed the initial period of structural adjustment has left a trail of victims among small and medium business owners and employees, urban wage earners, women, rural communities, and children.

Costa Rica represents an example of the positive results that can be obtained in a public welfare system when equity is genuinely valued. Direct public subsidies through health programs, education, housing, food, social security, water and sewage have reduced total poverty by two-thirds over the course of the 1980s.14 Thanks to its heterodox, balanced and creative focus, Costa Rica is one of the two countries in Latin America that in that traumatic decade succeeded in reducing poverty levels, including in the countryside. The other country is Cuba.