Economic Reform, Labor Markets, and the Social Sectors: A Latin American Perspective

This paper analyzes the social consequences of structural reform programs, and the relationship between economic transition and the social sectors. In particular, the hypothesis of poverty reduction as the main challenge for Latin American governments in the future is discussedj An improved distribution of income appears to be one of the most important features of sustainable reforms. - As a direct consequence of the adjustment programs of the late 1980s, government spending devoted to social programs was severely reduced. In fact, poverty increased in the region during the 1980s. However, attending to the needs of the poor for education, health and nutrition will allow a faster accumulation of basic human capital, accelerating overall economic growth. The paper highlights the relationship between macroeconomic stability and the social sectors. Macroeconomic stability, through low inflation and competitive real exchange rates, is a powerful weapon to improve income distribution. The pattern of growth and development is another determinant of the speed with which poverty is reduced. Growth that emphasizes labor intensive, exportable activities will be more effective. Growth associated with productivity increases will push wages up, reducing inequality. The paper also discusses the dynamics of adjustment and its relationship with labor market structures. Latin American labor markets are highly distorted, introducing serious efficiency costs and making adjustment more uneasy. These policy-induced distortions generated segmented labor markets and discouraged employment in the formal sector. The removal of the distortions will reduce the protected/unprotected wage differential (i.e. reduce formal/informal sector duality), increase international competitiveness of domestic firms and increase overall employment.