From Social Policy to an Open-Economy Social Contract in Latin America

After a decade of economic and political reforms that dramatically altered the structure of economies in Latin America, poverty and high inequality remain deeply entrenched. Integration into the global economy in the 1990s brought increased prosperity only to a small minority of households in most countries, primarily those in which adults had some university education. The reforms in themselves did not hurt the poor, but they left behind both the poor (using the international definition of those living on less than $2 a day), but the great majority of middle-income households who are, as I show, surprisingly poor by Western middle-class standards. What does this imply for future social policy in the region? I suggest in this paper the logic of going beyond the standard, poverty-targeted, elements of good social policy to a modern social contract adapted to the demands and the constraints of an open economy. A modern open-economy social contract would extend current social policy in two ways. First, it would be explicitly based on broad job-based growth. Second, it would be politically and economically directed not only at the currently poor but at the near-poor and economically insecure middle-income strata. I discuss critical elements of an open-economy social contract. These include unusually good fiscal policy; increasing effective taxation of the rich, making job mobility an explicit public policy goal, and a regional strategy for better access to rich country markets.