Toward a New Social Contract in Latin America

Nancy Birdsall and Rachel Menezes

12/28/2004

The “lost decade” of the 1980s in Latin America was followed by low growth and financial crises in the 1990s. More than a decade of renewed democracy and open market economic reforms have failed to deliver much growth or social progress, causing a spiral of anxiety and deep frustration in the region— with the political process, with political leadership, and with the way democracy is working. Economic activity in the last five years grew by only 2 percent on average, barely keeping up with population growth, compared to 3.7 percent worldwide, and to 3 percent in the 1990s. The proportion of the poor, which had been declining, has increased since 2000, not only in Argentina, where poverty rates have doubled, but also in Bolivia, Peru, Uruguay, and Venezuela. Income inequality remains high. Public opinion polls show Latin Americans tired of fiscal austerity, record high unemployment, and stagnant wages, and resentful of privatization and other so-called Washington Consensus reforms. Around 55 percent of people surveyed say they would not mind a non-democratic government if it could solve economic problems. Ten years after the first Summit of the Americas, the hopes for broadbased prosperity and poverty-reducing growth based on a strengthened marriage of open market and renewed democratic politics seem far from realized.

Although increased public social spending in the 1990s did benefit the poor to a degree, the economic reforms benefited mostly the already rich and well educated, without generating either growth or jobs. The squeeze for working class and middle-income households in urban areas has led to a heightened sense of insecurity and a growing opposition to market reforms.

This policy brief proposes a new job-based social contract, geared to the aspirations of the region’s vast majority of near-poor “middle” households, whose participation is key to achieving growth and strengthening democracy. This contract would emphasize tough and transparent fiscal management; make taxes and expenditures more progressive to “grow” a new middle-class; protect job mobility and workers’ rights (rather than jobs); and emphasize access to global markets, including through regional collaboration.

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