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SOCIAL EQUITY AND CHANGING PRODUCTION PATTERNS: AN INTEGRATED APPROACH
Two years ago, the secretariat of ECLAC put forward a proposal for the development of the Latin American and Caribbean countries in the 1990s entitled Changing Production Patterns with Social Equity (1). This proposal, which marked a milestone in a process of analysis and reflection that had begun long before (2), was submitted to the Economic Commission for Latin America and the Caribbean at its twenty-third session and was discussed at length on that occasion (3).
The proposal was originally conceived as part of an ongoing process involving the re-working of thoughts and ideas, rather than as a final product. In fact, however, it became the central point of reference for the thinking of the institution and, hence, a source of inspiration for the work carried out by the secretariat in preparation for the twenty-fourth session of the Commission (4).
During the 1990-1991 biennium, the secretariat focused its attention on certain aspects of the proposal which had not yet been developed fully. Some of the main such aspects were the role of social policy in changing production patterns with social equity (5), more detailed guidelines for the incorporation of a concern for the environment into the development process (6), the substance of an educational strategy geared to changing production patterns with social equity (7), and the role to be played by economic integration in the next stage of Latin American development (8).
In accordance with the mandate it received at the twenty-third session, in this document the secretariat has attempted to delve further into the links among technical progress, international competitiveness and social equity, although it does not, certainly, purport to have exhausted these subjects.
Two qualifying remarks are called for here. First, the secretariat is deliberately abstaining from becoming embroiled in the theoretical aspects of a controversy which has raged for centuries, and particularly since the French revolution, i.e., the debate surrounding the cause-and-effect relationships and possible areas of incompatibility among democratic governance, economic stability, growth and well-being. Rather than concerning itself with doctrine, the secretariat prefers to deal with the realities confronting virtually all the Governments of the region. These realities include the need to resume a sustained (and environmentally sustainable) growth process within the framework of the consolidation of pluralistic, democratic societies societies that are faced with very real demands to address the many ways in which the majority of the population has been bypassed by development.
Secondly, no attempt has been made in this document to provide a list of suitable policies for changing production patterns or for attaining greater social equity. Instead, the focus is on how certain pivotal analytical and policy aspects can be linked within an integrated approach so as to reinforce any existing areas of complementarity between efforts to achieve greater growth and efforts to seek greater social equity. This approach highlights the central tenet of the document: that growth, social equity and democracy can be compatible. What is more, there are significant but as yet largely unexplored areas in which social equity and changing production patterns complement and reinforce one another.
Experience shows that economic growth does not necessarily or automatically lead to social equity. ECLAC has argued, however, that environmentally sustainable growth with equity, in a democracy, is not only desirable but possible (9). Indeed, just as social equity cannot be attained in the absence of strong, sustained growth, such growth likewise calls for a reasonable degree of social and political stability, and this in turn means meeting certain minimum requisites of equity. From this interdependence between growth and equity comes the necessity to advance towards these two objectives simultaneously rather than sequentially, and this represents an unprecedented challenge.
For the purposes of this document, it is understood that equity will improve through advances in the attainment of at least one of the following three objectives. The first of these is to minimize the proportion of persons and households whose living conditions are below those which society considers acceptable, not only economically but also socially and politically. The second is to promote the development of the latent skills existing in all groups of society, progressively doing away with legally established privileges and forms of discrimination, as well as any other forms of inequality of opportunity, including those associated with social, ethnic or geographical origin or gender. The third is to do everything possible to ensure that neither power, wealth, nor the fruits of progress are concentrated in such a manner as to restrict the freedom of present or future generations.
Governments and societies have made many efforts to correct the inequalities which exist in the nations of Latin America and the Caribbean by placing ever-greater emphasis on social policies. At the same time, various international agencies have focused their efforts on the formulation of proposals for combating poverty and emphasizing the social aspects of development. The ECLAC secretariat, however, has preferred to tackle these issues through an approach which integrates the economic and social dimensions and seeks to bring out the areas of complementarity between growth and equity.
2. A single task: the integrated approach
There are various approaches to the best way of seeking out the areas of complementarity between growth and equity. One view, taking a monistic approach, contends that there is no incompatibility between the two; it is merely a matter of time. What is needed first is growth; once this is achieved, its fruits will soon benefit the majority of the population. There is extensive evidence in the region, however, which casts doubt on the validity of this so-called trickle-down approach. Another maintains that the best way of reconciling the objectives of growth and equity is to address them separately, with economic policy aiming at securing a satisfactory level of growth, while social policy concentrates on the problem of distribution. This dichotomy, which is attractive because of its operational simplicity, assumes that economic policy will be distributively neutral and that its regressive tendencies, if any, will be manageable; thus, social policy can make up for or correct any shortcomings with regard to equity.
There is every reason to assume, however, that the economic policy mix allows for extensive combinations, some of which may have wide-ranging regressive effects on distribution (if they give rise to high levels of unemployment or underemployment, for example) which often outstrip the progressive distributive effects of social policy. Consequently, it is not possible to pursue growth with equity unless the two are objectives of both economic and social policy. This is the integrated approach which is adopted in the present document. It involves, on the one hand, choosing economic policies which favour not only growth but also social equity and, on the other hand, emphasizing in social policy not only equity but also the effects of this policy in terms of productivity and efficiency.
Even if growth and social equity were always at odds, so that progress could not be made towards one except at the expense of the other, it would still make sense to give a distributive bias to economic policy in order to avoid even greater regressive impacts. There is indeed a tendency to emphasize the trade-offs between the two objectives rather than the areas in which they can complement each other, and this causes many opportunities for action to be overlooked. This is particularly notable when the area of complementarity is equal to or greater than that of the trade-offs, which is especially the case when growth is based on the spread or absorption of technical progress (see box).
The central aim of this proposal is thus to outline policies which take advantage of and strengthen the areas of complementarity and reduce those of trade-offs, so as to permit the objectives of growth and social equity to be addressed simultaneously, rather than sequentially, as a single, integrated task. Thus, of the three major types of policies which promote social equity those aimed at increasing productive employment, investment in human capital and transfers only in the latter could advances be made at the expense of growth. In contrast, while in the worst of cases investment in human capital could, because of its long lead time, involve sacrificing a modicum of present growth in order to secure greater growth in the future, in the long run such investment furthers competitiveness and equity. Finally, as the creation of productive employment is perhaps the strongest and best indication that growth and social equity are being achieved in a simultaneous and complementary manner, priority should be given to policies that stimulate the creation of such jobs, especially in combination with a rising level of productivity. It must be borne in mind, in this respect, that until such time as access to productive employment is open to all, there can be no question of even minimal levels of equality of opportunity.
3. Central elements of the integrated approach
a) Technical progress
A central element in the ECLAC proposal is the changing of production patterns based on the deliberate and systematic absorption of technical progress in order to attain increasingly higher and sustainable levels of productivity and to create a greater number of productive jobs. In order to bring about these changes, improvements are needed in entrepreneurial capacity and, above all, in the education and training of the labour force.
Enhancing competitiveness and improving the countries' insertion in the international economy are tasks that call for a better organization of production and marketing on the part of enterprises, be they leading corporations or microenterprises. Small and medium-sized firms are particularly important in this context, since they employ the bulk of the labour force and account for a good proportion of regional output.
The absorption and dissemination of technical progress calls for a suitable technological infrastructure, better production linkages from the natural resource base on up, and the modernization of basic production support services such as transport, communications, ports and trade. The proposal is thus systemic in nature, since it integrates the enterprise within an extensive set of linkages, all of which help to further international competitiveness.
Although technological modernization will necessarily include some elements of innovation, the fact that the region is a relative newcomer to industrialization and is at an intermediate stage of development means that the adaptation and absorption of existing technology is even more important. Consequently, the policies to be chosen should stimulate the rapid and wide-ranging spread of technological progress, which has less concentrative effects than providing incentives for innovation and may well turn out to be more equitable. This factor can also contribute to a process of convergence and complementarity between the aims of growth and social equity in Latin America and the Caribbean.
This process of technological modernization is not automatic, however. In fact, the economic history of the region since the Second World War shows that far from leapfrogging ahead, productivity has been rising at an ever-slower rate, a gradual erosion of the urban and industrial infrastructure has taken place, which in turn has had serious effects on employment and the quality of life of the most underprivileged groups, while technological progress has been more and more sluggish. Furthermore, economic growth has become increasingly costly: it has required ever greater investment and created fewer and fewer jobs. This is why it is so important to reverse this trend by changing existing production patterns.
b) Productive employment
A second salient feature of the integrated approach is the attainment of full productive employment, since this is the main means whereby the majority of the population can contribute to development and share in its fruits. As the wage bill (the product of the number of workers and the wages paid) depends above all on increases in total productivity, which in turn depends on technological modernization, only dynamic changes in production patterns can give rise to strong and sustained growth of both productive employment and total wages.
The idea that any significant form of growth could be led by the informal sector must therefore be discarded as illusory. This is not to deny its important role not only as a refuge for unemployed labour in times of recession but also as an expression of and channel for latent entrepreneurial talent. Except in a very few lines of activity where the informal sector displays notable dynamism, however, its wage bill is a direct function of the growth in formal activity. If the formal sector does not grow, then total informal-sector wages will not grow either. If informal employment did grow in these circumstances, it would be a spurious expansion, such as occurred in the 1980s. The truth, it would appear, is that in those years there was no increase in the demand for labour, but on the contrary an insufficiency of such demand: in other words, the growth in informal-sector employment was not due to the creation of new productive jobs but above all to the sharing out of the existing jobs among a larger number of persons. Non-spurious growth and modernization of the informal sector will accompany changes in production patterns, but they cannot lead them.
Of course, if a higher level of output per worker always meant greater efficiency and productivity, there could be a conflict between productivity and employment, since the enterprises and activities generating more employment per unit of output would necessarily be those with lower productivity. However, this apparent conflict between productivity and employment actually stems from incorrect concepts of efficiency and productivity. Thus, economic efficiency refers to the use made of all the factors of production, not just labour. As technological change usually gives rise to savings not only of labour but also of capital, a technology which generates a higher level of employment per unit of output and which may therefore seem to be less productive, may in economic terms be the most useful and have the highest overall productivity if it leads to a sufficient saving of capital, thereby doing away with the apparent conflict between productivity and employment (10).
c) Investment in human resources
A third cornerstone of the integrated approach concerns action to facilitate the accumulation of human capital (training, education, nutrition of children and expectant mothers, and health, including drinking water and sanitation infrastructure). This type of action, and especially investment in education, clearly illustrates the complementarity between measures aimed at achieving growth, on the one hand, and social equity, on the other. Indeed, in the present document special emphasis is placed on the promotion of education and knowledge, not only as a basic social service, but also as one of the pillars of technical progress. This is why, in order to reconcile efficiency with equity, it is essential to improve the quality of education and ensure that all social strata have equal access to it.
In order to achieve this, it is essential to increase decentralization and local autonomy, although the central government authorities should be given responsibility for strategic planning and for ensuring a minimum acceptable quality standard, together with the supplementary distributive allocations that this involves. Greater internal incentives are needed in order to induce prompter and better attention to the public's needs, as well as greater efficiency in the use of resources. In order for significant educational reform to be possible, a major, permanent financial commitment by society is needed.
4. Two basic features of the ECLAC proposal
As in the case of Changing Production Patterns with Social Equity, the proposal put forward in this document has two basic features. The first of these is that the elimination of distortions and the establishment of correct prices are not of themselves enough to ensure growth with equity. Instead, the deliberate and systematic incorporation of technical progress into the production process requires not only correct prices but also selective intervention, sectoral policies and institutional changes in the economic and social network within which enterprises operate. The second characteristic is that the specific proposals must differ in line with the initial conditions of the region and of each of its countries.
a) Institutional changes
With regard to institutional changes, the present document delves most deeply into three mechanisms which are often neglected in other approaches but which are in fact essential in order to make simultaneous and sustainable progress in the areas of growth and equity. First, the effective functioning of markets not only involves market-based prices and deregulation (that is to say, passive action) but also often calls for active intervention in order to create or stimulate markets which do not yet exist or are insufficient or segmented. There are serious shortcomings in the capital markets, for example, especially in terms of investments in human capital and long-term financing, not only for medium-sized and small enterprises but also for microenterprises. These problems will be analysed later.
Secondly, because markets are interrelated, intervention is really required in the market where the shortcoming originated, rather than in the market where the fault finally manifested itself. This is so in the case of unemployment and underemployment, for example: from a long-term perspective, the origin of these faults is not so much in the labour market as in the capital market (relative scarcity, poor mobility, segmentation). In the short term, on the other hand, the rise in unemployment and underemployment during stabilization processes is due not so much to the stickiness of wages as to other shortcomings such as inflated and insufficiently flexible prices in the goods market, because producers expect a higher rate of inflation than that projected in the current economic policy.
Thirdly, in addition to improving the markets it is necessary to make structural and institutional changes. Examples of these are measures to modernize labour relations and promote worker participation in improving the results of their enterprise, or the emphasis on the need to take measures to increase savings, not so much by raising interest rates as through social security insurance or loans for investments in education, housing and access to agricultural land.
b) The special features of the region and of each country
Even if there were no differences at all between the general approaches for promoting growth with social equity, specific proposals must necessarily vary in line with the initial conditions prevailing in the Latin American and Caribbean region, which distinguish it from other regions of the world, and the different conditions of the individual countries.
It may be recalled in this respect that a great many of the Latin American nations, whose economies are at an intermediate stage of development, have a solid existing industrial base and their inhabitants mostly live in urban areas. At least in the case of countries where industrialization has already made important inroads, this raises the question of how best to use this industrial base and how to orient it towards exports.
Likewise, in view of the fact that in the post-war period there has been an extraordinary expansion in education in many countries primary education is virtually universal, and secondary and university-level enrolment has also risen significantly the comparative advantages of the region must increasingly be sought in production activities which make intensive use of skilled or semi-skilled rather than unskilled labour. Hence the insistence that the central aim of educational policy should increasingly be to improve the quality rather than the mere quantity of education.
Finally, the region is relatively well endowed with natural resources, especially non-renewable resources. These represent a rich heritage through which to promote international competitiveness based on the incorporation of technical progress within a process of growing production linkages, attempting to ensure that this does not inhibit the development of other exports (11).
5. Main aspects of policies to promote the integrated approach
None of the aspects considered to be of central importance in the integrated approach technical progress, the creation of productive employment and investment in human resources are objectives specifically associated with a single policy but must to some extent form part of virtually all policies, whether economic or social. The main policy areas to be considered include technical progress, modalities of integration into the international economy, savings and investment, labour markets, social policy and participation.
a) Technical progress and interaction with the international economy
The improvement of the region's insertion in the international economy through increasingly complex and dynamic exports is the counterpart of changing production patterns with social equity (12). This appears to be the most promising way of securing rapid and sustained growth in productive employment and the wage bill and thereby contributing to both growth and equity. This is so in the short term, because the current shortage of foreign exchange means that expansion of output and employment is closely dependent on the generation or saving of such funds. Likewise, although until recently incentives in the region were strongly biased towards production for the protected domestic market, it is reasonable to assume that it will be easier and more advantageous to generate additional foreign exchange by expanding exports rather than making further attempts at import substitution.
In the long term, an internationally competitive orientation likewise promises to be more efficient and equitable, since the potential additional exports are usually more labour-intensive than whatever import substitution may still be attempted. In particular, it may be expected that the new exports will incorporate ever greater value added, especially of skilled and semi-skilled labour. However, as soon as progress is being made towards the simultaneous attainment of growth with social equity, the expansion of domestic demand will tend to take on greater relative importance as a source of economic buoyancy.
Since the immediate aim is to gain international competitiveness, especially through the promotion of exports, a much broader range of policies than mere tariff reduction will be required (13), for experience suggests that international competitiveness is based just as much on systemic efficiency as on the nature of the countries' participation in the most dynamic markets. In order to achieve and maintain such competitiveness, suitable economic and sectoral policies are naturally required. However, this result also depends on human resources; the vigour and breadth of vision of the entrepreneurial base; the absorption and spread of technical progress, two of whose most important expressions are informatics and telecommunications; and finally, the scientific and technological system and its linkages with the system of production.
A coherent and sustained macro-economic policy, including a high and stable exchange rate, together with the rationalization and reduction of tariffs and the replacement of non-tariff barriers with tariffs, would appear to be a necessary but not sufficient condition for progressing in the field of international competitiveness. Consideration will also need to be given, among other measures, to the introduction of subsidies to cover research and development costs in selected export lines considered to be promising and dynamic; the establishment of special incentives to back up pioneering exports (and, to a lesser extent, to support the other non-traditional exports) or to penetrate new markets; the reduction of excessive loading and unloading costs in ports; the broadening of the export base of the country's medium-sized and small enterprises; and promotion of the internationalization of leading firms through investments abroad.
b) The saving and investment process
The rapid creation of productive jobs, and hence the possibility of growth with social equity, are closely dependent on the level of investment. In order for this growth and the employment thus generated to be sustainable in time, it is also necessary to invest in the recovery and conservation of natural capital, which is currently suffering excessively rapid depreciation (14). This is why a greater public and private austerity effort is essential, both to raise investment and to move towards greater equity. Increased saving, especially by wage-earners, is doubly favourable for this objective, since it makes it possible to create productive jobs and stimulates the accumulation of capital by the workers themselves. Thus, by raising the level of workers' saving, it is possible to avoid the apparent dilemma of having to tolerate inequitable structures in the hopes of maintaining high levels of saving; in other words, instead of raising saving by transferring income from wage-earners to financiers as is often suggested, it is preferable to increase it by restricting the present level of consumption of wage-earners but allowing them to enjoy the fruits of the greater investment level which results from their savings effort.
Some potential mechanisms for this purpose are institutionalized investment-savings schemes (supplementary to or independent of the social security system) and other mechanisms which encourage saving to become eligible for programmes to provide housing, access to land, or education.
Likewise, even if social security is not reorganized on the basis of individual capitalization, it is possible to increase public saving by reducing the deficit of many social security systems by taking steps to eliminate special privileges, to adapt benefits to a working life which is now a good deal longer than in the past, and ensuring that the benefits are in line with the actuarial value of the respective welfare fund and not its cash flow.
In order to speed up the creation of productive employment, it is necessary not only to increase saving, but also to improve the allocation of the corresponding capital, since the shortage of productive jobs (or the presence of underemployment) is usually due not only to shortcomings in the labour market but also to failures in the physical capital and land markets. Thus, the region's employment problem is due not only to the relative shortage of capital which is an inevitable feature of any developing country but also to a shortage of employment aggravated by the limited mobility of capital between firms and sectors, as is shown by the high degree of self-financing that is a characteristic of all enterprises except the largest ones. This insufficient mobility of capital, together with the concentration of capital and land in just a few hands, is one of the reasons why some enterprises and activities are excessively or prematurely capital-intensive. Thus, not only is available capital not put to good use, but most of the other enterprises are forced to work with an insufficient amount of capital or land, and with extremely labour-intensive, inefficient technologies.
It is necessary to overcome the most serious shortcomings in the capital market in order to increase efficiency and employment and, ultimately, improve income distribution. Prominent among these shortcomings is the fact that there is no long-term capital market for the bulk of the firms in the region (those whose shares are not traded on the stock exchange), nor is there any market for investment in human capital. Likewise, there is a lack of mechanisms to provide or take the place of guarantees for a large number of small enterprises, nor are there channels for the distribution of credit to which the bulk of agricultural enterprises or small or medium-sized firms in the other sectors of production can gain access.
The land market suffers from serious shortcomings, and access to it is very inequitable: a significant proportion of the land is not covered by legal deeds; in a number of countries, ownership is still highly concentrated, and, moreover, the appraised value for tax purposes is low and erratic, while there is no suitable machinery for raising the appraisal value with the passage of time or because of improvements in public infrastructure; nor has there been full development of the potential for leasing, especially in respect of the purchase of used equipment (non-polluting), which is often very suitable for small firms in all sectors.
c) Labour markets: participation and consensus-building
In order to create productive jobs, substantial changes must be made in labour relations. The market trends towards more differentiated products of higher quality require the gradual replacement of vertical, hierarchical structures in enterprises by more horizontal and flexible systems characterized by intensive feedback, in order to make fuller use of the initiative, creativity and responsibility of the labour force. Modernizing labour relations in this way means that, on the one hand, the enterprise treats its workers as valued partners rather than as mere factors of production. On the other hand, it calls for a technified trade union movement which is aware that its opponent is not so much the entrepreneur as other competing firms, and that its objectives must therefore also include the raising of productivity.
There are various means of participation which point in the right direction. Among these, one which could promote cooperation instead of confrontation is the system of participative wages. This system not only stimulates improved productivity by paying part of the wages on a variable basis (as a function of profits, sales, or some similar arrangement) but, even more importantly, tends to stabilize or even increase employment. It would therefore be well worth exploring this form of remuneration, which although it is just beginning to be applied in the region has begun to attract growing interest.
d) Social policy: investment in human resources and transfers
The lack of resources in the 1980s had a serious effect on social expenditure, and it is therefore essential to recover past levels of funding in order to be able to make beneficial investments in human resources and carry out minimum transfer programmes. Until those levels of spending are recovered, however, it will be all the more urgent to set clear priorities between the various social programmes and within each of them. Except in the case of urgent relief measures for situations where the survival of human beings is at stake or there is an imminent danger of irreversible deterioration of certain basic indicators of well-being, this means giving preference to social policies which are functional to development, at least in the early years of the process of restructuring and growth.
Particularly important in this respect are social investment programmes aimed at halting the transmission of poverty from one generation to another. The highest fertility rates are found precisely in the poorest families; likewise, mothers of poor families run the biggest risk of having difficult pregnancies; their children suffer from the worst nutritional deficiencies, and they have the biggest problems of learning in school and register the highest rates of repeating school years and dropping out of school altogether. Later, they have the greatest likelihood of ending up in dead-end, low-productivity jobs in the informal sector, thus completing the vicious circle of poverty, which is transmitted in this way from one generation to another.
In order to break this vicious circle, the measures taken must concentrate on those links in the chain which reproduce poverty conditions from one generation to another. In addition to measures in the field of education, which were already referred to in previous sections, such action must seek to: i) create conditions which favour responsible parenthood, so that families can bring their fertility closer to a rate they desire, as far as possible; ii) promote the establishment of mother and child care programmes which will ensure that low-income women have access to regular examinations and care during their pregnancy, followed by similar attention for mother and baby, supplemented with free or subsidized milk programmes; iii) expand pre-school education (including supplementary food programmes), especially in low-income sectors, and iv) expand training programmes so that every worker will have access to them not just once but several times during his working life.
Finally, with regard to longer-term transfer-based social policies especially those carried out through the social security system their coverage should be expanded both in terms of the type of benefits provided and the incorporation into them at least as far as basic benefits are concerned of groups of needy persons not covered by the system. This is necessary because the present social security system is marked by very serious shortcomings from the point of view of social equity, which are reflected in the insufficient coverage provided by the system and sharp differences in benefits, adversely affecting in both cases the welfare of the poorest and most marginal social groups.
Likewise, priority should be given, as far as possible, to transfers which increase household income rather than that of individuals, centring this attention on allowances for the lowest-income heads of households. This approach concentrates the benefits on the poorest families, tends to further formal employment for the lowest-income heads of households, and raises income in a more socially acceptable way, since the household income is supplemented when the head of household is working, in contrast with other types of income supplements or subsidies which are only given if the head of household is unemployed.
e) Participation, changing production patterns and social equity
The present trend towards the consolidation of democracy in the region would be further strengthened by growth with social equity; alternatively the erosion of equity would frustrate and weaken it, giving rise to social and political instability. Attaining a state of equilibrium in this respect means eschewing both the temptation to resort to technocracy (which does not take account of social demands) and the lure of populist solutions (which place voluntarism above technical considerations). The most appropriate course is that based on the mobilization of the most inherently legitimate instruments of democracy: participation and consensus-building (15).
For this purpose, it is necessary among other things to organize the beneficiary groups, since they are usually not only on the sidelines of the sources of economic power but also marginalized from social and political power. Indeed, the evolution of social policies in the history of the developed countries has gone hand in hand with the democratic organization of society. The difficulty in the present circumstances, however, is that it is not just a question of empowering those who have hitherto been excluded, in order to make the programme politically viable, but also of ensuring that they participate in a responsible manner, since it will obviously not be possible to satisfy all their pent-up demands in the short term.
Clearly, no programme for changing production patterns with equity can give good results without extensive consensus-building, and the pent-up social demands can be kept under control only through a programme which assures broad participation by the people at large in the results. For this purpose, it would be a good idea to place greater emphasis on, inter alia, decentralization and municipalization.
6. Factors conditioning the integrated approach
Finally, it is clear that there are many factors which condition the capacity of governments and societies to advance towards changing production patterns with social equity and above all to seek growth based at once on greater international competitiveness and greater equity. Three of these factors are explored in this document, and some proposals are put forward for minimizing their conditioning effect.
a) The international scenario
The profound changes which are taking place in the international environment, and their impacts on the countries of Latin America and the Caribbean, will be determining elements for the success of changing production patterns with social equity. Both the surprising geopolitical developments and the recent globalization of the economy introduce an element of uncertainty with regard to the external environment which will call for an ever-greater capacity for adaptation on the part of the countries of the region. At any rate, these changes have momentous implications which call for both individual and collective responses from the countries of Latin America and the Caribbean, as well as a reconciliation of views in the field of international cooperation.
In view of the globalization of the international economy, there is an even greater need for multilateral rules, and to ensure that, in the liberalization of world trade, bilateral or regional integration agreements become the building blocks of a transparent and non-discriminatory economic system, rather than stumbling-blocks to its progress. In the financial field particularly in view of the growing demand for financial resources all over the world it is essential to continue the efforts to increase domestic savings, as well as to strengthen the process of reduction of the external debt and to introduce new financial mechanisms to forestall possible problems stemming from an excessive multilateral debt burden. All this could be supplemented with the diversification and monitoring of those financial instruments which are enabling some countries of the region to gain renewed access to international private capital markets.
The recovery and subsequent maintenance of basic macroeconomic equilibria is a necessary requisite for any process of changing production patterns with equity. Severe imbalances make sustained growth impossible and have a harmful distributive impact on the poorest groups. The less recessionary an anti-inflation programme is, the less severe its impact on employment, and hence on income distribution. This means, as in other cases, that efficiency in production and social equity are basically complementary factors in the stabilization phase. At all events, in view of the critical nature of the situation in that phase, it is often impossible to do much more than lessen the damage suffered by the neediest groups, by taking steps to ensure the maintenance of at least a minimally acceptable level of subsistence.
Experience indicates that the smaller the outward resource transfer is, or the longer it can be spread out over time, the lower the economic and social cost of this type of adjustment. This is not enough, however, for without strict fiscal control and correction of key relative prices, every stabilization programme will run the risk of failure. At the same time, the danger of a deep recession will be still greater unless steps are taken to guide the inflationary expectations of economic agents. This is why it is so important that such a programme should be accompanied by a price and incomes policy if possible reached by consensus which brings prices as quickly as possible close to their equilibrium values: that is to say, values compatible with the target figure for inflation implicit in monetary and fiscal policy.
Experience also indicates that the greatest recessionary and distributive effects are related to reductions in expenditure (a decline in investment but not in current outlays, or the elimination of general indirect subsidies without offsetting this through selective direct subsidies). Hence, an adjustment which allows for fiscal equilibrium while at the same time increasing fiscal revenue rather than reducing public expenditure will naturally tend to be less recessionary in its effects.
c) Restructuring the public sector
Progress can be made towards changing production patterns with equity only by substantially restructuring the public sector. This means, on the one hand, that governments must give up many functions where their action is not considered essential, especially in the field of production, while on the other hand they must devote themselves even more vigorously to certain key functions such as macroeconomic management, social and distributive investment, promoting the improvement of the country's insertion in the international economy the absorption of technical progress into the production process, and defence of the environment (16).
None of these tasks will succeed unless public sector finances are strengthened and consolidated by ensuring a reasonable amount of revenue and a sound tax structure. Indeed, perhaps the most telling index of the true weakness of the public sector is the difference between its enormous capacity for spending and its severely limited capacity for collecting revenue.
In this respect, fiscal policy is a fundamental link between economic and social policies aimed at making progress simultaneously towards growth based on rising productivity and towards greater social equity. On the one hand, unless it is possible to reduce the fiscal deficit and keep macroeconomic imbalances within acceptable limits, achieving sustained changes in production patterns will not be possible. Indeed, in order to increase national saving and hence growth and productive employment, it is vitally important to consolidate a fiscal balance on more solid and lasting foundations. On the other hand, a substantial part of the potential achievements of the desirable social policies both in investment in human capital (education, training, health and nutrition) and in social security and transfers will depend on the collection of sufficient resources to cover these needs.
This is why it is proposed to attain fiscal balance on the basis of a reasonable level of revenue rather than through mere reductions of expenditure. Expenditure has in fact been significantly cut in most of the countries in all areas, with two important exceptions: public external debt service and, very often, military spending. This fact, together with the low taxes prevailing in most of the countries of the region, means that it is necessary to recover levels of tax revenue at least equal to those obtained before the crisis, and in many cases they should even be increased, since in most of the countries of the region there is ample room to raise them without losing competitiveness. The scope for such increases is particularly great, of course, in those countries where the tax burden does not exceed 10% of GDP. Moreover, the tax system is perfectly capable of contributing to the redistribution of resources, not only through the structure of expenditure but also through revenue collection, which of course means a broader tax base, with less evasion, and a more progressive tax structure.
7. A feasible task
The task of simultaneously achieving a change in production patterns, accompanied by social equity, in a context of environmental sustainability is much more complex than the pursuit of only one of these objectives; while sacrificing or neglecting the others. Modern societies increasingly see them as an indivisible group, however, so that a lag in any one of the three would mean lower standards of well-being. This same social appraisal means that a process which ignores any of the objectives simply cannot be sustained, for such processes lead to social tensions, violence, and the ultimate reversal of such little progress as might have been made in relation to any of the objectives.
Consequently, it becomes a matter of the highest priority to explore policies capable of leading to the simultaneous achievement of the above-mentioned social objectives within a context of freedom. This document puts forward an integrated approach based on the realities of the region and other recent ECLAC studies. In addition, it proposes certain strategic policy lines, with emphasis on those that tend to strengthen changing production patterns with equity in a sustainable manner.
The conclusions of this exploration are promising: the gradual attainment of the proposed objectives appears to be feasible. There are policies for achieving them; there is a conceptual framework against which to set the specific actions and their results, and the crisis of the 1980s, despite all its negative effects, has served as a stimulus for the taking of some difficult steps which allow for the growing consolidation of the economic, social and institutional foundations for future progress.
(1) ECLAC, Changing Production Patterns with Social Equity. The Prime Task of Latin American and Caribbean Development in the 1990s (LC/G.1601-P), Santiago, Chile, 1990. United Nations publication, Sales No. E.90.II.G.6.
(2) For background on both recent and more remote developments in this regard, see ECLAC, Change and Crisis: Latin America and the Caribbean 1950-1984 (LC/L.332(Sem.22/3)), Santiago, Chile, 1985; Latin American and Caribbean Development: Obstacles, Requirements and Options (LC/G.1440-P), Cuadernos de la CEPAL series, No. 55, Santiago, Chile, 1987; and Towards Sustained Development in Latin America and the Caribbean: Restrictions and Requisites (LC/G.1540-P), Cuadernos de la CEPAL series, No. 61, Santiago, Chile, 1989.
(3) The proposal received widespread support from the member Governments. See ECLAC, Biennial Report. Official Records of the Economic and Social Council, 1990, Supplement No. 14 (LC/G.1630-P; E/1990/43), Santiago, Chile, 1990; in particular resolution 507(XXIII), Changing Production Patterns, Social Equity and the International Development Strategy.
(5) See ECLAC, Panorama Social de América Latina. Edición 1991 (LC/G.1688), Santiago, Chile, October 1991, and ECLAC, La equidad en el panorama social durante los años ochenta (LC/G.1686), Santiago, Chile, October 1991.
(6) See, for example, ECLAC, Sustainable Development: Changing Production Patterns, Social Equity and the Environment (LC/G.1648/Rev.2-P), Santiago, Chile, 1991. United Nations publication, Sales No. E.91.II.G.5.
(10) On the other hand, there may be distributive problems if the new technology makes it possible to save more labour than capital. As in this case the market itself will tend to reduce wages, it will be necessary to apply compensatory policies financed by the increase in output generated by technological change in order to offset the possible regressive effects that could result.