The Political Economy of Pro-Poor Policies in Chile and Mexico

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The Political Economy of Pro-Poor Policies in Chile and Mexico August 8, 1999 Marcus Kurtz Department of Political Science University of Miami PO Box 248047 Coral Gables, FL 33124-6534 USA 305.284.1306 marcus.kurtz@miami.edu Paper prepared for WDR 2001 meetings. August 16-17, Castle Donnington, United Kingdom. The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 1 I.

I NTRODUCTION Under what political and economic conditions are public policies that materially benefit the poorest stratum of society sustainable? More specifically, what types of pro-poor policies are sustainable, and under what political and economic conditions? It is well known that lasting anti- poverty efforts require supporting political coalitions that go beyond the very poor who are the beneficiaries of these programs.

This paper examines, in the cases of Mexico and Chile, the factors that affect the emergence of such cross-class alliances. The answer depends both on the type of policies pursued and the institutional and social environment (including the prevailing developmental model, the structure of the state, the party system, and the prevailing levels of organization among the poor in civil society). To begin, policies that benefit the poor are disaggregated by target 4are they oriented toward the production process, or are they subsidies ... more. less.

to consumption? The former is further disaggregated into those that focus on the redistribution of assets and those that focus on the correction of market failures. Consumption policies are divided into benefits of a highly targeted (or 8means tested 9) variety, and those that are more universalistic in applicability. Politicians construct policy from this broad menu of alternative (and not mutually exclusive) policies, but the also face constraints given by the prevailing national strategy of development. While there are elective affinities between particular models of development and patterns of poverty alleviation, the former by no means cause the latter. Sustainable pro-poor policies are at their core political outcomes. It is the potentially controversial argument of this essay that sustained efforts at poverty eradication are most likely in democratic political systems where administration and governance are centralized, efforts are focused on the production side, consumption supports are universalistic (or broadly distributed), and more than one reformist party is electorally viable. The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz While decentralization might in theory make anti-poverty programs more accountable and efficient, in practice the absence of both local democracy and administrative capacity often make decentralization institutional structures inauspicious for sustained and effective poverty relief. Furthermore, regionalization necessarily introduces new political barriers to the redistribution of public funds by superimposing territorial cleavages atop those of social class. Production-side approaches are more easily implemented because precisely they obscure the distributional impact inherent in anti-poverty spending and allow politicians to argue that the policies are both social and developmental. Where more than one reformist party competes electorally, politicians cannot take the poor for granted as constituency, and face the possibility of a policy 8bidding dynamic. 9 This may also lead to the provision of universalistic benefits that at once raise the economic costs of, and the political support for, income support policies. From an economic point of view this is obviously inefficient 4it subsidizes those who do not need support 4but it builds a broad social constituency behind a set of policies (e.g., family allowances, health care, pensions) that can have substantial poverty-mitigating effects in marginal communities. Finally and most critically, without the accountability inherent in a highly competitive political arena, politicians will have a tendency to use antipoverty projects to stave off moments of dissent, not to construct broad and sustained bases of support. II. P OLICY C OMBINATIONS AND P OLICY T RAJECTORIES IN C HILE AND M EXICO What constitute 8pro-poor 9 policies, and which of them are most sustainable, given varying constellations of political and economic conditions? In Chile and Mexico the battle against poverty has historically been a two-front affair 4efforts have been made to improve the insertion of marginal groups in the process of production as well as the more obvious consumption-side efforts to improve access to basic necessities for poor households. But the specific production The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 3 and consumption side policies employed have changed quite substantially over time. On the production side, efforts have historically focused on either the redistribution of private assets from economic elites into the hands of either the state or marginal sectors. Thus, for example, nationalizations of productive enterprises have ostensibly been used to increase employment, subsidize the cost of vital goods and services, provide services to communities ignored under strict profit-maximizing criteria, and direct the character of the national economy in a more 8egalitarian 9 direction. Especially in agriculture, efforts at the redistribution of land from large-holdings to cooperatives or individual family farms have been conceived of as direct attacks on historically inegalitarian sectors as well as efforts to improve output and productivity. More recently efforts to improve living standards through policies toward the productive side of the economy have focused on the correction of missing or failing markets, especially those that affect marginal producers. Thus, instead of operating against capitalist agents through attacks on prevailing property relations, the state makes efforts to broaden access to the market economy. Prominent examples include the allocation of credit to entrepreneurs normally ignored by the formal credit market, the provision of public goods like price information, technological research, and agricultural extension, and the construction of physical infrastructure and human capital that make linkages between marginal communities and national markets possible. In their way, all production-side approaches seek to improve the ability of poorer citizens to insert themselves into the national economy. They differ substantially, however, in terms of the social and political coalitions that would support each policy approach. The most obvious examples of pro-poor policies are those that in a very direct way transfer resources aimed at improving the consumption standards of poorer citizens. Here the important distinction is between those policies that are universalistic 4whose beneficiaries include but are not limited to the poorest strata of society 4and those that are targeted strictly at the 8truly poor. 9 Examples of the former would include national health and pension schemes, family allowances, The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz subsidies on the prices of basic wage foods, and in important ways the minimum wage. 1 On the other hand there are policies that are strictly targeted at the poorest strata of society, including means-tested direct transfer payments, minimum poverty-pensions, food programs (e.g., mothers and children programs), and subsidies for the private acquisition of education and health-care. Different combinations of production and consumption-side approaches have been attempted at different points of time in Chile and Mexico (see Figure 1). In both Chile and Mexico during the heyday of their respective import-substituting strategies of development, production side anti- poverty efforts were part of a larger statist and redistributionist policy. The parastatal sector expanded in industry, while serious agrarian reform was launched in Chile under Frei and Allende (1967-73), and deepened in Mexico under Echeverría (1970-76). On the consumption side in Chile, wages were increased across the board through rapid expansions of unionization and permissive labor laws. In addition, strong efforts were made to bring formerly excluded groups (informal sectors, peasants) into national pension and health-care schemes; they for the first time became near universal. In Mexico, consumption side policies were universal, largely taking the form of subsidies on the price of basic commodities through the CONASUPO program 1 The case of the minimum wage is not entirely clear cut. On the one hand it directly affects only the lower end of income-earners. On the other, its effects tend to spread throughout the bottom end of the wage scale 4raising wages of earners near the minimum in conjunction with the level of the minimum wage. In this way it affects a relatively broad stratum of society 4and often individuals that are not members of poor households. Whether this is an effective strategy to combat poverty is an entirely separate question, one that requires consideration of broader labor market conditions and whether a minimum wage increase is sufficiently great to generate unemployment or to push workers into the low-pay informal sector. These empirical issues will be considered later. The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 5 In both countries, the transition to a neo-liberal form of economic organization brought with it substantial changes in the social policy regime. Under military rule in Chile, most formerly public enterprises (except copper mines) were privatized, the pension system was transferred to the private sector, and public anti-poverty aid was narrowed to highly targeted efforts. The transition to democracy in 1990, however, brought some changes, as universalistic programs (the minimum wage, family allowances, education vouchers) received funding increases while targeted programs stagnated by comparison. On the production side, from 1973 onward, aid has been concentrated on the correction of market forces. Nationalization and land reform have Figure 1. Historical Typology of 8Pro-Poor 9 Policies PRODUCTION ORIENTED Asset Redistribution Market Failure Correction CONSUMPTION ORIENTED Targeted Universalistic CHILE 1973-1989 CHILE 1964-1973 CHILE 1990-1999 MEXICO 1988-1999 Dramatic expansion of labor organization and public social welfare provision (Chile). Rapid and broad agrarian reform (Chile) Land reform and subsidized wage foods (Mexico) Abandonment of state-ownership of productive assets. Social provision privatized. Public provision only for most marginal sectors. Expansion of production-oriented policies in technological/market support and human capital formation. Increased spending on universal social benefits, stagnation in highly targeted social spending. MEXICO 1934-1988 The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 6 explicitly been removed from the national political agenda by parties spanning the spectrum from conservatives to socialists. Mexican policy, at least since the sexenio of Carlos Salinas, has similarly abandoned the formerly large state-sector, launched the privatization of agrarian reform cooperatives ( ejidos ), and reoriented spending around highly targeted consumption supports (PRONASOL under Salinas, and under Zedillo, PROGRESA). III. D EVELOPMENT M ODELS AND THE L IMITS ON P RO -P OOR P OLICY -M AKING The types of policies described in Figure 1 outline the constellations of anti-poverty approaches that have been attempted in contemporary Chile and Mexico. But at any particular point in time political elites cannot reasonably select from this entire universe of policy options. Historically, efforts are made to ensure that a particular social welfare regime is compatible with the overall national developmental strategy. In this sense, the development model serves to loosely bound approaches to poverty alleviation, independent of the effects of different political coalitions. In the post-depression era both Chile (1932-1973) and Mexico (1934-1988) pursued statist and inward looking developmental models. While such models could in theory be compatible with the gamut of anti-poverty strategies outlined in Figure 1 (and indeed with no strategy at all), I make the case that they have an 8elective affinity 9 for asset-redistributive policies on the production side, and universal social provision on the consumption side. Under import- substitution, economic growth is heavily constrained by domestic market size. In economies with substantially inegalitarian distributions of income, the size of the domestic market for many manufactures is quite small (well below scale economies). One strategy for market expansion to underwrite economic growth is thus quite coterminous with poverty alleviation 4populist efforts at broad-based income redistribution. The costs of this policy for domestic industrialists are compensated for by the larger market that becomes available, and the oligopolistic position of The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 7 firms in local markets. On the production side, asset redistribution (most especially land) is a way both to increase output and bring a sector of society previously marginalized from the consumption of manufactured goods into the domestic market. This is, however, only an affinity not a causal necessity. While such policy approaches were pursued under the Christian Democratic government of Eduardo Frei and under the socialist Salvador Allende in Chile, they were not characteristic of the Mexican period of 8stabilizing development 9 under a succession of PRI governments. In the latter case, after 1940 land reform slowed dramatically, and consistent anti-poverty programs were not central to public policy. The difference in outcome highlights the centrality of politics 4the different outcomes are accounted for by the differential organization of the Mexican and Chilean political systems of the time. Marginalized sectors in Chile had much greater independent organizational coherence, and a more competitive political system made elites quite responsive to them. IV. C HILE : D EMOCRATIZATION , P OLITICAL R EFORM , AND THE S HIFT TO P RODUCTION -O RIENTED AND Q UASI -U NIVERSAL A NTI -P OVERTY P OLICY It is the argument of this paper that the character of anti-poverty policy in Chile changed in important ways after the democratic transition of 1990. While most outside analysts would concur that the level of spending increased substantially, the conventional wisdom is that spending continued in the highly targeted vein that emerged during military rule alongside the neo-liberal developmental model (e.g., Vergara 1994, 248). On the other hand, governmental sources highlight the very substantial broadening of the target base of social welfare policies (e.g., MIDEPLAN 1991, p. 17). This change is linked to the process of democratization. As political decisions become subject to open competition, new dynamics came to govern the construction of social policy. In Chile, this has resulted in the shift in focus to more universalistic consumption side policies, and the emergence for the first time since 1973 of serious production- The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 8 side welfare efforts. What does this tell us about the political coalitions that support comparatively sustained efforts at poverty eradication? At the most general level in Chile, with the return of open political competition, the construction of a governing coalition on the center-left 4the Concertación 4 produced a decline in the targeting of welfare efforts. After 17 years of military rule, the organized constituencies of the Concertación sought to regain some of the (very substantial) ground they had lost since the coup. But these organized sectors, while hardly privileged, were by no means the poorest and most excluded elements of Chilean society. As a consequence, however, welfare efforts have not excluded the poor, but rather included them but as part of broader beneficiary coalitions. A further, and much-heralded innovation, was an emphasis on production side anti-poverty relief. Here the political sustainability of more targeted forms of aid is greater 4these are after all policies aimed at 8helping the poor help themselves. 9 They are certainly redistributive, but can be marketed as both strategies of economic growth and poverty alleviation. Nor is the demarcation of winners and losers entirely clear. Consumption Side Targeting and the Military Government During the course of military rule, policy outcomes did not respond to political pressures in the same ways that they had under democratic rule. And during this period, in conjunction with the neo-liberal reorganization of the state and the economy, the system of social welfare was restructured around highly targeted forms of aid. While the 8technocrats 9 of the military government have contended this was simply a consequence of apoliticism and efficiency in the new system of social provision, I contend that it was as political as any governmental decision. The difference lies in the different character of politics that take place in authoritarian versus democratic contexts. Under authoritarian rule, where the construction of strong positive political and social coalitions may not be essential, aid can be targeted in a compensatory fashion at the The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 9 most disadvantaged (and potentially most oppositional) sectors of society. It takes on a short term, 8finger in the dike 9 character. It need not be used to consolidate support, rather to temporarily dampen opposition. Data on public spending demonstrate the degree to which the universality of social provision declined during the course of military rule, and the consequent increase in targeted forms of welfare spending. In the aggregate social spending declined dramatically (once resources transferred to the privatization of the pension system are removed), but spending on the poorest sectors of society increased. Table 2 presents the value and scope of social welfare policy from the military period through the democratic transition. Once the neo-liberal economic model had become firmly entrenched with the social reforms (pensions and health privatization) of the early 1980s, we can see a massive expansion of targeted forms of social provision, both in terms of beneficiaries and coverage. From 1983 through the end of military rule, the number of individuals receiving welfare cash transfers expanded 67 percent (though the real value of the transfers declined 41 percent). By contrast, the quasi-universal family allowance remained constant in coverage while the real value of the payout declined 55.5 percent. Most notably, the minimum wage (which ironically does not benefit the extremely poor, but rather the formal sector workers at the lower end of the wage scale) declined 35.9 percent from its peak in 1981 to the end of military rule in 1989. The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 1 Table 2. Changes in Social Welfare Targeting under Military Rule Thousands, pesos of 1990, per Month TARGETED ASSISTANCE UNIVERSAL ASSISTANCE Real Cash Trans- Poverty Family Minimum Civilian fers (SUF) Pensions (PASIS) Allowance Wage Pensions Index Year Recipients Value Recipients Value Recipients Value (1970=100) Avg. Value 1970 n/d n/d 0 0 n/d 2429 100.0 31,354 1974 n/d n/d 0 0 n/d 2547 108.3 16,184 1977 n/d n/d 66,000 6989 n/d 2118 119.3 17,964 1981 n/d 2,031 156,200 9819 3,962,000 1987 138.7 24,528 1983 527,000 1,604 229,400 9901 3,929,000 1564 109.5 26,229 1986 1,086,000 1,246 324,700 9059 4,024,000 1119 85.8 26,072 1989 896,000 951 292,900 7840 3,817,000 696 88.9 27,724 1991 879,000 1155 289,100 9430 4,021,000 903 103.4 30,065 1996 766,082 1164 326,447 10,326 3,200,000 895* 128.0 n/d *The average of three rates; subsidies are phased out at the highest income levels. Sources: For Pensions, SUF recipients, Family Allowances from 1970-1991: Raczynski and Romaguera (1995,297); for 1996, MIDEPLAN (1998, 12-20); for value of SUF, to 1991: MIDEPLAN (1992, 246). Real minimum wage, all years, Bravo and Vial (1997, 151). While obviously the Chilean government did not abandon targeted social spending after the democratic transition, it also very obviously did not deepen the process of targeting. While the value of cash welfare transfers was increased, the program 9s size had been capped in 1986 and coverage declined thereafter as recipients leaving the program were not replaced. Moreover, the program is a complement to the family allowances scheme 4which covers only those citizens affiliated to a private or public pension system. Thus, it in essence makes universal the presently- regressive family allowance program. The only area in which some targeting is evident is in the value of the poverty pension, where its value expanded more rapidly than the average civilian pension (though both experienced sustained increases in real value). The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 11 Production Side Spending: Investment in Human, Social, and Productive Capital Production side investment with an anti-poverty component has taken principally two forms in Chile. The most explicit is the social investment fund (FOSIS), aimed at encouraging human capital formation, supporting micro-enterprises, and improving infrastructure in marginalized areas. It also directly incorporates the goal of increasing the organizational capacity in civil society. In addition, there are the decentralized regional and local development funds (FNDR and ISAR). Here the aim is investment for development, but the infrastructural needs of marginal areas are given substantial priority. It is in the latter category that post-transition spending has increased most notably. While the regional development funds (FNDR) have been in existence since 1976, they had low and declining levels of support during the period of military rule. 2 Indeed Table 3 shows the rise in both decentralized and overall public investment in Chile. Over the 1989 to 1994 period the former increased 178 percent in real terms, while the latter rose 80.2 percent. Unlike the case for demand side assistance, public investment funds have increasingly moved into channels that incorporate anti-poverty criteria. FOSIS funding, as an experimental program, has been largely constant at roughly US$50 million since program inceptions (Wurgaft 1993). Table 3. Decentralized Social and Infrastructural Investment (Thousands of pesos of 1986) Source of funds 1989 1990 1991 1992 1993 1994 Decentralized 12,777 12,058 15,305 27,536 33,562 35,631 FNDR 12,777 12,058 15,305 17,177 21,483 21,922 ISAR 0 0 0 10,358 12,080 13,709 Overall Public Investment 101,132 95,399 118,641 147,980 164,216 182,287 Source: Serrano (1996, 69-79). 2 The exception has been the period after 1985, when funding through the Inter-American Development Bank was obtained. This funding has continued until the present, and represents a large portion of total spending. The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 1 IV. P OLITICS , D ECENTRALIZATION , AND THE E MERGENCE OF Q UASI - U NIVERSAL AND P RODUCTION -O RIENTED A NTI -P OVERTY S TRATEGIES I characterize the social policy of the governing Concertación alliance in Chile as one of limited universalism. This has not marked a return to the politics of the 1960s of massive increases in broad-based entitlements, but it has meant a broadening of the benefit structure to incorporate large swaths of the middle and working classes. Not surprisingly, these are also the voters most supportive of the ruling alliance and most politically articulated. Thus, while social spending has increased dramatically, the vast majority of this new money has not been specifically targeted at the 8very poor. 9 But why and how has this occurred? The shape of the policy outcome depends on four critical politically-mediated factors: (1) party system dynamics, (2) the level of administrative centralization, and (3) the issue area, and (4) the level of social organization. Party Competition . Since the democratic transition, Chile has been governed by a coalition of Christian Democratic and Socialist parties (Concertación de Partidos por la Democracia, or Concertación). This coalition was a product of the effort to defeat the referendum on continuation of military rule held in 1988, and has since evolved into a governing alliance that has elected two presidents (both Christian Democrats). Indeed, according to Agüero and Tironi (1999), the new axis of Chilean politics is bipolar, and cast around this democat/authoritarian divide, supplanting earlier class and religious cleavages. This cleavage is reinforced by an electoral law that places a high premium on cross-party cooperation. 3 As a result, however, changes in social policy are negotiated at the highest levels of the parties, supported by all Concertación members, and not subject to substantial revision based on the demands of organized 3 The binomial electoral system consists in a series of two-member districts. In these districts the first and second place finishers receive seats, unless the first place list receives double the votes of the second place list (in the Chilean context, this is rare). Especially in Chile where the left is slightly weaker than the center or right, this is a powerful incentive keeping the Socialists in the Concertación alliance. The fate of the The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 13 social constituencies. The 8bidding 9 dynamic 4the competitive expansion of the welfare state driven by political conflict between center and left 4that characterized the 1960s and early 1970s has been replaced by a 8responsible 9 center-left alliance with an emphasis on fiscal probity in competition with a neo-liberal right pushing minimalist government. In the process, the organized social constituencies and competitive political dynamics that historically shaped policy have declined substantially. In particular the Concertación alliance has moderated the policy proposals of the socialist left. Instead, the Concertación has brought moderate (and regressively financed through the VAT) increases in social spending and targeted them to its constituencies in the middle and lower classes. 4 Thus, a large proportion of the increase in social spending after democratic transition went to the broadly applied (though recently more progressive) family allowance, serving all but the highest income categories. Thus social spending was in a sense 8universalized 9 to the Concertación coalition. But the political dynamic that brought this about was anything but 8bottom up. 9 Instead the coalition made decided efforts to contain pent-up demands attendant upon the democratic transition. The comparatively austere approach taken by post-transition governments is evident in the data on composition of income in Table 4. While poverty declined quite dramatically over the period 1987-1996, this was not due to dramatic increases in the incidence of government transfer payments in the incomes of the poor. Indeed, even for the poorest quintile, government transfers as a percentage of total income declined by nearly 50 percent. Clearly, public payments (for all quintiles) lagged well behind growth in earnings in the private sector. The earlier 8bidding dynamic 9 of rising public payments and stagnant wages has decidedly not reemerged. Indeed, the weight of beneficiaries in the political system is so limited that even under a center-left Communist party 4formerly electorally important, but now without any legislative representation 4is a stern reminder of costs of independence. 4 Agüero and Tironi (1999,161) show that in class terms, the Concertación wins overwhelmingly among the lower classes, is competitive in the middle sectors, and decidedly unpopular among the upper class. The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 1 government, parity in the level of public assistance has not been maintained. Table 4. Public Subsidies as a Percentage of Cash Income, by Income Quintile, Chile 1987 1990 1996 Income Quintile 1 22.6% 15.5 11.3 2 7.1 4.4 4.0 3 3.9 2.2 2.0 4 2.0 1.1 0.7 5 0.7 0.4 0.1 Source: 1987, 1990: calculated from MIDEPLAN (1992, 247); 1996: calculated from MIDEPLAN (1998, 30). Further evidence of the moderating effects of the present bipolar structure or political competition can be found in the host of issues were explicitly removed from the political agenda before President Aylwin took office, in the program of government of the Concertación 4 including a commitment to the broad outlines of the neo-liberal model and the agrarian counter- reform. Pension, health, and industrial privatizations not only would stand, they would be expanded. While not all of these concessions were to the liking particularly of the socialist fraction of the alliance, alternatives were limited. Without participation in the Concertación, the Socialists would suffer serious political consequences. On the other hand, the risks attendant upon making concessions were low 4the constituencies whose demands were left unfulfilled would have little political alternative, certainly not among the parties of the right. Thus, what we see are broad but moderate policy reforms. Indicative of the fiscal responsibility (that is, limited spending) is the fact that the largest sustained increases were in the minimum wage. This is a policy that affects large swathes of income-earners in Chile, and costs the treasury little. Direct transfers increased in value (though overall spending increased only moderately as coverage declined), but by modest amounts. The entire increase in the welfare family allowance (SUF) between 1989 and 1996 amounted to little more than US$1 per month. This was in contrast to a long period of decline, but substantially less than the 44 percent real The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 15 increase in the minimum wage over the same period. Indeed, a large portion of the new funds raised at the time of the democratic transition were expended in raising the family allowance and average pension levels. These programs are anything but targeted. Decentralization . The relationship between the decentralization of public authority and the sustainability of pro-poor policies is a complex and contradictory one. The present trend toward decentralized administration has arisen in part because of dissatisfaction with the results of centrally directed strategies that prevailed before the 1980s (Manor 1999, 34). But a positive case has also been made on efficiency grounds, that decentralized administration allows better opportunities for local participation in decision-making, is more flexible and responsive, and allows for more efficient allocation of public resources (e.g., Serrano 1996, 28). To realize these gains, however, it is important that local government institutions have the power autonomously to define activities, obtain sufficient resources, have adequate administrative capacity, and be politically accountable in a democratic fashion (Manor 1999, 55). Moreover, decentralization is consonant with the neo-liberal maxim of subsidiarity 4nothing should be done at a higher level of government that can be done at a lower level. But these are conditions for the more efficient implementation of policy, not necessarily for the political sustainability of anti-poverty projects. Indeed, I contend that in many ways processes of administrative decentralization work at cross-purposes with the goal of sustaining anti-poverty efforts. First, in real world conditions in underdeveloped countries, the level of democratization and responsiveness of the political system may not be constant across levels of government. Localities in fact are often the bastions of quasi-authoritarian forms of clientelism and caciquismo . 5 Second, long-underfunded and politically irrelevant municipal governments may lack the administrative capacity to effectively manage important anti-poverty programs 4 making them likely to fail and become discredited. Third, responsiveness at the local level and The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 16 the targeting of resources via local elites requires a densely organized civil society capable of pressing demands. But those in most need are likely to be those most unable to project their voices; and their interests may well be better-represented at the national than at the local level. At the national level areas of organizational strength for popular sector actors in one region can be used to press for reforms that benefit the sector as a whole. Finally, since virtually all anti- poverty programs require politically costly redistributions of resources, adding a territorial dimension increases the difficulty in constructing majority coalitions. Decentralized political systems tend to keep resources at the local level, but given the spatial segregation of poverty they impede the inter-regional income shifts required to address poverty. And in the process class cleavages are superimposed on regional cleavages, making efforts to combat poverty an attack on both class privilege and 8local autonomy. 9 In the end this fragmentation of authority reduces the ability of pro-poor actors to establish cross-class alliances. Divisions are heightened and the gains for the more well-to-do from such cooperation are reduced. The process of decentralization in Chile began in the 1970s with the redesignation of regional and municipal boundaries, and the conferral upon the municipalities of a developmental role. In the process, municipal boundaries were redefined to increase internal class homogeneity. In the 1980s, the responsibilities of municipal government were expanded dramatically, to include education, health, and some welfare services. With the democratic transition in the 1990s, municipal authority was constituted as an independently elected body and regional governments with a planning role were interposed between national and local authorities (Serrano 1996, 32-3). While by the 1990s this reflected a form of 8democratic decentralization 9 and a further consolidation of the process of democratization, its implications for pro-poor policies were decidedly more ambiguous. On the one hand strengthening municipalities and making them responsible for much social provision has heightened inequality. While some effort at leveling 5 Examples abound, from the rural clientelism of northeastern Brazil (see Weyland 1996), to the dominance The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 17 the resource differences are made via the common municipal fund (FCM), a substantial portion of local taxes remain in the municipality of origin (including 40 percent of the property tax, and 50 percent of license and permit fees) (Miranda and Meneses 1993, 67-8). And since the value of real property varies dramatically by location, decentralized funding makes wealthier localities more able to support the social services most needed elsewhere. Increases in inter-municipal transfers could ameliorate this, but would come at a substantial political cost. Moreover, they would undermine the notion of decentralization by removing tax resources from local control. Perhaps most telling is that the bulk of local resources dedicated to the amelioration of poverty come through the regional development funds. The FNDR has for a large component of its production-side spending criteria that prioritize marginal areas, including rates of extreme poverty, and rural character (Irarrázaval and Joannnon 1993, 124). Interestingly, this development fund is composed of tax resources and a separate component continuously financed by the Inter-American Development Bank (IDB) since 1985. The former (traditional FNDR) carries none of the poverty-targeting restrictions that are linked to the FNDR-IDB funds. Politically, where tax revenues are implicated, regional development funds do not incorporate an anti-poverty component. It is only where the funds are external and come with conditions that anti-poverty components are prominent (Serrano 1996, 39-40). Where funds might be otherwise employed, the decentralized municipal authorities do not necessarily prioritize the most marginal sectors. And even in programs locally administered, but where discretion is almost non-existent, for example the SUF income subsidy, there are concerns that the funds are used to replace existing anti-poverty resources, which are then reallocated to other areas. Instead, territorial concerns tend to concentrate funds in areas outside the Central Valley (where the bulk of the population resides), reflecting the representational biases of the political system. Social Organization and Civil Society . Finally, those policies that generate multi-class of traditional elites in the rural south of Mexico (Fox 1994), to the historical domination of the Chilean The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 18 support, particularly the support of organized constituencies of the Concertación are those most likely to survive and receive high levels of funding. Indeed, the most successful anti-poverty strategy may be one that involves a fairly comprehensive welfare state at a relatively centralized level. This serves both to hide the real distributional impact of transfers and to build large political constituencies behind policies that help society 9s marginalized sectors (though at the cost of subsidizing those less needy). From the Chilean evidence, the focus on highly-targeted aid may be difficult to sustain in a democratic context. Indeed, linkage to powerful organized interest groups may be the only way in which anti-poverty programs survive at all. Ultimately, the sustainability of pro-poor policies is a political question. When important organized constituencies align to support and extend such programs, they can overcome the disadvantages posed by decentralized administrative systems and less competitive national political arenas. But this requires the representation of popular sector interests by powerful intermediaries that are valuable to middle class actors as allies, and are capable of punishing politicians who fail to implement their promises. Unfortunately, the most disadvantaged sectors of society 4the informal sectors in the peri-urban areas and the peasantry 4are also those least likely to have strong organizational intermediation. In Chile, they clearly lack political connections to the right, and have only weakly-defined organizational linkages to the left. As a consequence, these groups are largely captive constituencies of the Concertación. Why is this the case, and what can be done about it? Much of the organizational weakness of the popular sectors can be attributed to the social effects of the neo-liberal developmental model pursued since the late 1970s. Indeed, one of the key aims of many of the reforms of the military era 4particularly in social provision, labor law, and the pension system 4was the disarticulation of what had formerly been exceedingly powerful beneficiary coalitions (see Piñera 1991). Individualization was the watchword, as the state largely ceased to have direct responsibility for countryside by local land-owners (Loveman 1976). The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 19 levels of benefit or the terms of labor agreements. In addition, systematic political repression coupled with extremely 8flexible 9 labor markets coupled (and two waves of severe unemployment and recession) served to undermine most organized actors in civil society (see Garretón 1983). But this atomization disproportionately affected the poorest elements of society, as organization in the countryside all but disappeared. 6 Even the briefly hopeful signs of organization among the urban popular sectors in the mid-1980s quickly evaporated (Oxhorn 1995). Thus while the national peasant (CNC) and labor (CUT) confederations are directly tied to the governing parties of the Concertación alliance, their ability to affect policy decisions is notably weak (in marked contrast to the situation that prevailed in the 1960s and early 1970s). Indeed, the peasant sector has had virtually none of its key demands addressed, despite ten years of governance by political allies. The labor movement has been slightly more successful, but has obtained only minor changes in the labor code and has been marginalized from discussions over the minimum wage. 7 The production side investments of the post-transition governments have some potential to mitigate this problem. Particularly the FOSIS program has had as one of its several goals the reconstruction of a more vibrant associational life among marginalized sectors 4it thus represents an effort at both human and social capital formation. Undertaken on a sufficiently ambitious scale, this has the potential to produce a virtuous cycle of expanding organization and ever more solid political bases for further and deeper anti-poverty efforts. Politically the program is structured around a cross-class alliance, and this underlines its stability across time. First, it deliberately involves the private sector in its project structure. The fund undertakes no projects directly, operating instead through private firms or organized social 6 On the sector-specific aspects of social and political disarticulation, see Kurtz (1999). 7 Initially, the Concertación saw the minimum wage as an issue for corporatist bargaining between the Chamber of Commerce (CPC) and the labor confederation (CUT). The CPC quickly withdrew from the process, and recently the government has preferred to unilaterally impose minimum wage increases without coming to an agreement with the CUT. The government has shown little flexibility, and it has not been punished for this stance. The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 2 groups. On the one hand it provides micro-enterprise funding, especially for peasants and indigenous groups. But it does this largely by offering credit indirectly through the private financial system (by subsidizing banks, savings and loan institutions, and NGOs). Second, its community development (social) aspect operates through and promotes the creation of local development committees. It is explicitly hoped that these will survive after the initial seed money by FOSIS disappears, leading to improvements in local governance and increased capacity to articulate and promote interests. Unfortunately, the program is quite small and has remained so. Since its inception, it has been funded at a level around US$50 million, making it more of an experimental project than a focus of public policy (Wurgaft 1993, 59). And some of its goals have worked at cross purposes. For example, by routing micro-enterprise credit through the formal financial system, resources have been targeted at the largest cmicro d enterprises, as these are the most profitable sites for lending. Similarly, the project assignment system tends to reward already well-organized areas, routing funds away from those areas most in need of social capital formation, but least able to present a coherent proposal for support. While this is obviously an interesting policy because of its multi-class character, focus on human and social capital, and lack of a transparently redistributive side, higher levels of funding and direct effort aimed at stimulating local development committees will be essential if it is to initiate such a virtuous cycle. VI. M EXICO : R ISING P OLITICAL C OMPETITIVENESS , E CONOMIC L IBERALIZATION , AND THE S HIFT TO P RODUCTION -O RIENTED AND T ARGETED P OVERTY A LLEVIATION In the 1970s and 1980s Mexico also experienced dramatic shifts in its strategy toward the alleviation of poverty. These shifts coincided with sea changes in both the political and economic arenas. In the wake of the debt crisis, the formerly highly-protected Mexican economy was rapidly and radically liberalized, culminating in economic integration with North America via The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 21 NAFTA. Politically, fifty years of hegemony by the Institutional Revolutionary Party (PRI) was coming to a close, heralding the rise of a competitive (but well short of democratic) regime. This had important implications for the character and sustainability of pro-poor policies. Initially efforts at asset redistribution and nationalization were expanded (1970-82), but after the onset of the outward oriented developmental strategies, these reforms were entirely abandoned. Instead, an expansive but highly targeted form of consumption support was launched, coupled with large social investments in infrastructure and human capital. While economic crisis and the emergence of strengthened political opposition compelled a state response to poverty, and while economic liberalization removed some options from the agenda, it was the political dynamics and institutional arrangements that dictated the final outcome during the sexenios of Salinas and Zedillo. One-party hegemony in Mexico had long been the backdrop for the absence of sustained efforts to combat poverty. Only after the legitimacy of the political system came into question with the guerrilla uprising of the late 1960s and the massacre of student demonstrators in Tlatelolco in 1968 was an effort to reconstruct political support for the PRI launched, using the vehicle of populist redistribution. By 1987, however, wrenching economic crisis and internal division led to an end to PRI hegemony and Carlos Salinas 9 near loss of the presidency in 1988. 8 In the wake of this challenge to PRI dominance, a massive but now targeted effort to combat poverty (and opposition victories) was undertaken under the rubric of the National Solidarity Program (PRONASOL). Many of the basic outlines of this program have been sustained under Zedillo 9s PROGRESA project. The characteristic feature of antipoverty policy in Mexico has been its instability across presidential terms. This underlines the less competitive aspect of Mexican politics and the reactive character of pro-poor policies. Until marginal 4particularly rural 4actors achieve The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 2 effective and sustained independent organization, the outlook for long-term poverty alleviation policies is indeed bleak. The organizational basis for a broad cross-class alliance to support them is not yet present. Anti-Poverty Policies in Mexico in the Era of PRI hegemony (1934-82) During the period of PRI hegemony in Mexico, policies designed to combat poverty generally took a backseat to goals of economic development. The notable exception to this was periods in which the dominance of the PRI was under threat, and the legitimacy of its rule was widely questioned. In this context, efforts to combat poverty were undertaken, but not generally sustained beyond the time of the immediate threat to the PRI 9s power. Indeed, until the 1980s, it difficult to directly identify pro-poor policies, since the latter were often constructed in developmentalist (and political) rather than social terms. On the production side, efforts at asset redistribution formed a core element of Mexican anti- poverty strategy. In this vein, the redistribution of agricultural land from large private haciendas to collectively farmed and state-administered ejidos formed the initial core of the developmental and social effort. But this form of asset redistribution was central only in two periods, the administrations of Lázaro Cárdenas (1935-40), and Luís Echeverría (1971-76). While land was distributed throughout all of the post-revolutionary presidencies, it was only during these two sexenios that high quality arable lands were seized in large quantity and over the strenuous objections of powerful elites (see Table 5). 8 While the official results show Salinas the winner with a bare majority, many observers believe that the election was actually won by the center-left opposition led by Cuauhtémoc Cárdenas, with fraud as the root of Salinas 9 victory. The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 23 Table 5. Land Redistribution during the Mexican Agrarian Reform (Hectares) President Period Real Redistribution Lázaro Cárdenas 1935-40 20,074,704 Manuel Avila C. 1941-46 5,286,636 Miguel Alemán 1947-52 3,129,285 Adolfo Ruíz C. 1953-58 3,469,958 Adolfo López Mateos 1959-64 3,162,796 Gustovo Díaz Ordaz 1965-70 4,120,530 Luís Echeverría A. 1971-76 6,516,262 José López Portillo 1977-79* 753,689 Source: Adapted from Goodman, et al. (1985, Table 8). *Data for first three years of this administration only. By the late 1970s José López Portillo changed direction, declaring that the agrarian reform was effectively over, though final abolition would await constitutional reforms implemented by Carlos Salinas (1988-94). Poverty in Mexico is very substantially rural, and there were a variety of other production- side interventions in the ISI period that supported rural producers. The degree to which these can accurately be labeled 8pro-poor 9 policies is questionable, given that the poor by no means always captured the majority of the resources transferred. These were developmentalist policies that as a by-product sometimes worked to support peasant production. Critical here were crop price supports, publicly provided crop-insurance, input provision and technical assistance, irrigation projects and public distribution channels. Until the 1980s, Mexican agriculture was characterized by a bewildering array of state policies, controlled prices, and contradictory cross-subsidies. Unfortunately, as the CONASUPO price-fixing system faced fiscal crises in the 1970s, its price- floors became price-ceilings. And the benefits of the other production supports tended to differentially benefit the capitalist and already well-off areas of the north, rather than rain-fed peasant producers of the south (Sanderson 1986, 251). Indeed, there are substantial indicators that for much of the period of stabilizing development (1940s-1960s) net resource transfers flowed out of the countryside, worsening the plight of all farmers, but particularly the poor The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 2 (Goodman et al., 1985, 12). Consumption side policy worked in direct contradiction to production policy. It was the goal of the Mexican state to promote domestic industrialization through a cheap food / low wages nexus. Thus, the CONASUPO program sought at once to purchase crops at relatively high prices to maintain agricultural dynamism, but then to provide these to urban workers at prices rising more slowly than the general price level. This approach would change in degree, but not character until after the crisis of the early 1980s. Indeed, even when food security re-emerged as an important priority, and the Mexican Food System (SAM) was launched (1980) in an effort to create simultaneously national food self-sufficiency and improve the level and quality of food consumption of the nation, little effort at targeting resources was possible. Instead, price incentives and controls, public distribution, and input provision provided cheap food to the nation as a whole, but not necessarily the poorest within it. Indeed, the cheap foods provided by CONASUPO were open to all, but their concentration in wealthy and urban zones gave them a regressive bias (Sanderson 1986, 266). And such an ambitious and universalist effort could not survive the fiscal crisis initiated with the debt crisis in 1981-82. Anti-Poverty Policy in Times of Crisis (1982-1999) When the debt crisis detonated in 1982, it rendered inviable both the statist developmental model and the prevailing system of social provision. As moves were made toward the liberalization of markets 4they would culminate in a dramatic trade opening and privatization 4 social services were slashed across the board. Critically, the universalist aspect of the old system of social welfare embodied in the price controls and subsidies on domestic wage foods could not survive in the face of an enormous fiscal crisis. Indeed, austerity was the watchword of the first post-crisis sexenio (1983-88), and social development spending 4which contracted by 6.2 percent per year 4fell more rapidly than general expenditures (Friedmann, et al. 1995, 344-6). The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 25 It would not be until the election of Carlos Salinas that an altogether new strategy of poverty relief would be adopted in Mexico. This new strategy, embodied in the National Solidarity Program (PRONASOL), was explicitly designed to make social spending compatible with neo- liberal adjustment strategies, target social programs directly at those most in need, and bypass central corporatist and clientelist institutions (Consejo Consultivo del Programa Nacional de Solidaridad 1994, 11-12). This very ambitious program reoriented Mexican anti-poverty policy into highly targeted forms on the consumption side, and market-failure corrections (including human and social capital formation) on the production side. Table 6 presents a breakdown of the very considerable resources allocated to this program. Table 6. Production and Consumption Oriented PRONASOL Spending, 1989-1994 (Thousands of new pesos of 1989) 1989 1990 1991 1992 1993 1994 Consumption-Side Supports 1,266,919 1,953,475 2,526,213 3,431,617 3,817,502 2,683,053 (includes education, health, housing, and food aid) Production-Side Supports 1,050,668 1,772,892 2,343,264 2,672,277 2,729,020 1,998,801 Regional Development Infrastructure (613,314) (893,854) (1,488,259) (1,520,684) (1,474,748) (1,197,045) Direct Aids to Production (437,354) (879,038) (853,062) (1,153,594) (1,254,271) (801,766) Source: Data from SEDESOL (1994a, 176-190) adjusted by the December to December variation in consumer prices as reported by the Bank of Mexico. At least officially, this marked a fundamental change in Mexican social policy. In addition to a strong emphasis on the targeting of resources, PRONASOL actively sought the participation of local social groups in both the design of the projects to be funded and in their execution. The basic mode of operation was through the local solidarity committees, of which during the six year life of the program some 250,000 were operational (SEDESOL 1994b, 23). The political independence and 8bottom up 9 character of these committees varied a great deal, but the principle of using social welfare funds to alleviate poverty and create the basis of local social capital The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 26 simultaneously was a core innovation of the program (see Fox 1994). Importantly, unlike earlier efforts, PRONASOL was market friendly, involving neither price controls nor direct competition with the private sector (as CONASUPO had entailed) (Cornelius et al., 1994, 10-11). Like so many grand projects in Mexico, the life of PRONASOL ended with economic crisis and the election of a new president 4Ernesto Zedillo 4in 1994. While much of the orientation of PRONASOL was retained by president Zedillo, the administration of social welfare funds was restructured dramatically. Instead of using the solidarity committees 4directly linked to the central government 4to allocate funds, the bulk of social spending was reorganized through the federal structure. States and municipalities were for the first time given an important role in the conduct of national anti-poverty policy, with the federal government officially relegated only to the definition of broad goals (see Poder Ejecutivo Federal 1995, 124). Table 7 outlines the spending patterns for social welfare and infrastructure under Zedillo. In inflation adjusted terms actual spending has declined since the heydey of PRONASOL 4in part due to the peso crisis of 1995 and the subsequent fiscal tightening in 1997-8, also partly due to a decline in funds derived from privatization. More importantly, however, by 1999 more than 77 percent will be managed by state and local governments. Table 7. Anti-Poverty Spending under Zedillo, 1995-1998 (Millions of pesos) 1995 1996 1997 1999* Federal Spending 10,002 12,114 13,313 4,078 Decentralized Spending FSM, FDSM, FAIS** 5,612 7,150 8,223 13,934 TOTAL 15,614 19,264 21,536 18,012 *These represent funds budgeted, but not actually spent. **For 1995, this represents the Municipal Solidarity Fund (FSM), for 1996-7, the Municipal Social Development Fund (FDSM), and for 1999 the Fund to Support Social Infrastructure (FAIS). Sources: For 1995-97 Federal Spending, SEDESOL (1999a); for 1999, SEDESOL (1999b). For The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 27 decentralized spending, SEDESOL (1999c). VII. S USTAINING AN A NTI -P OVERTY A GENDA IN M EXICO What is apparent in the Mexican context is the constraining character of the national developmental model for the shape of any set of anti-poverty policies. When the strategy was inward looking and highly statist, the government looked to programs of asset redistribution (land reform, nationalization) and broad based producer and consumer subsidies. The idea was to increase investment and broaden the scope of markets (by raising the consumption capacity of the poor) simultaneously. Quite often in this context, markets were distorted through price controls and subsidies and public agencies competed directly with private actors (for example through marketing boards and parastatal firms). When the painful choice was made in the 1980s to reorient the economy along free market lines, the available options for social policy shifted dramatically. External opening and price liberalization precluded most of the policies of the past, while requiring that any new policies be 8market friendly, 9 neither distorting prices nor competing with the private sector. Thus consumption subsidies were targeted at the very poor 4typically not highly involved in market transactions in any event 4and the operated through private intermediaries (the private financial system, cash transfers to individuals, etc.). But economic strategy does not determine the scope or character of anti-poverty policy. During the statist era, activist and redistributionist policies characterized the governments of Cárdenas in the 1930s and Echeverría in the 1970s, but poverty was largely ignored in the intervening years. Similarly, during the neo-liberal turn anti-poverty programs suffered massive cutbacks under de la Madrid in the 1980s, only to return in a new and extensive form under Salinas (and to a lesser extent Zedillo) in the 1990s. These changing outcomes 4both type and The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 28 scope of pro-poor policies 4have fundamentally political explanations. Political Competitiveness and Democratization . In Chile, except for the authoritarian interlude, politics has always been a highly competitive affair with all tendencies having a meaningful chance of assuming national executive power. The dynamic in Mexico, while not involving the brutal authoritarianism of the Pinochet dictatorship, has been quite different. Since the revolution, politics has been dominated by a single political force 4the PRI. While since the 1988 presidential elections party politics have become substantially more competitive (with the left (PRD) and right (PAN) oppositions winning gubernatorial elections), no alternation of national executive power has ever occurred. This places the Mexican governing party in a somewhat different position than its Chilean counterparts. With the effective blending of state and party resources, its task has been to respond to incipient dissatisfaction instead of creating and maintaining a majoritarian political constituency. With corporatist institutions (labor unions, peasant confederations, and popular sector organizations) that still reach deeply into civil society, its position is secure by default in the absence of a powerful, autonomous, and organized opposition. And social welfare policy has historically responded directly to such autonomous pressures from below. In the 1930s when Cárdenas faced the difficult task of stabilizing politics and building a lasting institutional base, policy became very responsive to peasant and worker interests. But once control was solidified in the corporatist institutions he created, support for these sectors declined dramatically. Indeed, as a consequence of political stability, anti-poverty efforts were permitted to take a back seat to economic development for more than two decades. Only in the early 1970s, in the wake of serious peasant mobilizations and urban unrest that rocked the foundations of the corporatist system, did a return to 8populism 9 and pro-poor policies emerge under Echeverría. A similar dynamic is apparent in the 1980s. When Miguel de la Madrid came to power at the onset of the economic catastrophe of the debt crisis, he did so in the context of very limited The Political Economy of Pro-Poor Policies in Chile and Mexico Kurtz 29 opposition. As a consequence of this he was able to focus government policy strictly on an effort to stabilize the economy, ignoring altogether the social consequences of this turn toward austerity. Pro-poor policies suffered dramatic reductions, real wages collapsed between 7.7 and 10.5 percent per year between 1983 and 1988, and implicit unemployment reached 20.3 percent by 1985 (Friedman et al., 1995, 334-41). The consequences of this catastrophe were left to the next president 4Carlos Salinas. Elected with the narrowest margin in Mexican history, 50.3 percent, amid very plausible charges of fraud, Salinas clearly faced a powerful and organized political threat in the form of Cuauhtémoc Cárdenas and the PRD. His response was to launch a massive new program of poverty relief that was also very centrally a political strategy. Resources were to be targeted not simply by degree of poverty, but also to areas of opposition strength. In this fashion he sought to relegitimate the government and turn back the opposition threat (see Horcasitas and Weldon 1994). Indeed, by the 1991midterm elections PRI supported had rebounded to 61 percent of the vote. This was a remarkable feat indeed, especially given the scope of the economic catastrophe of the 1980s. Unfortunately, the only partially-democratized character of the Mexican political arena renders the formation of broad based pro-poor alliance difficult. The ruling party still responds to opposition in a reactive fashion, and the prospect of left victory 9 is not realistic enough to provoke more serious 8bidding 9 over the scope and character of social policy. Decentralization . An important aspect of the politics of Mexican social policy since 1988 has been an emphasis on the local level planning and implementation of anti-poverty efforts. But decentralization in the Mexican context begs important questions. During the S

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