Cross-cutting social policy challenges

It is important to recognize that inclusion policies face cross-cutting challenges that influence their design and implementation. One of the most relevant is the need for adequate targeting of beneficiaries to ensure that interventions effectively reach the populations that need them. A clear example of the need for improvement in this dimension is ex post redistributive policies, such as non-contributory cash transfer systems Stampini et al. (2023) document that only 55 % of the population living in poverty benefits from these programs, while 41 % of people living in households receiving at least one non-contributory transfer are above the poverty line.

In addition, it is crucial for the State to have the technical and institutional capacities necessary to implement efficient policies. The capacity to design, coordinate and execute inclusion programs is a key determinant of their success. The lack of these competencies can limit the scope and effectiveness of initiatives. A more efficient State also contributes to a more adequate use of resources, thus potentially alleviating the fiscal strain associated with the need to expand social policies.

Another important challenge is the need to guarantee sustainable financing that will allow inclusion policies to be maintained in the long term, and that these policies are not threatened in the context of fiscal restrictions or electoral cycles. In the last three decades, public social spending has doubled its share of gross domestic product (GDP), and that of total public spending has increased in practically all countries, from less than 46 % to almost 54 %. This reflects the regional effort to build more robust social protection systems. Nevertheless, levels of social spending in the region are lower when compared with OECD countries. Although part of this difference is due to demographic factors (OECD countries have older populations and higher pension spending) and economic development, a significant portion is explained by lower coverage and generosity of social protection programs in Latin America and the Caribbean (Álvarez et al., 2020). Increasing coverage and guaranteeing a minimum quality floor for the services provided to the most vulnerable groups require ensuring adequate financing.

A pending challenge for social policy in the region is to improve its redistributive capacity. Although social spending, excluding contributory pensions, tends to equalize income distribution in Latin America and the Caribbean, tax systems as a whole have limitations: they manage to reduce inequality, but do so to a lesser extent than in other upper-middle-income countries, and significantly less than in advanced countries (Lustig et al., 2023). In some countries, the combination of social spending and taxation not only fails to reduce poverty but, in cases, may actually increase it (Higgins y Lustig, 2016). These results indicate that tax policy, which is beyond the scope of this chapter, plays an important role both in financing policies and in reducing inequality.

Finally, the design of the inclusion policy must consider the effects it may have on the incentives for companies and beneficiaries to avoid undesired distortions in the labor market or investment, and ensure that incentives for productivity and economic growth are not undermined. This is crucial with regard to the benefits and financing of social protection instruments, such as health, pensions and other income transfer programs (box 3.3). Although these issues are beyond the scope of this chapter, they are fundamental to the discussion of specific policy instruments, as they directly influence the effectiveness and viability of inclusion strategies.

There is great room for improving equity and efficiency in Latin America, because we are precisely in a context where a dysfunctional, outdated design of social protection and tax instruments, such as special regimes for companies, are simultaneously causes of poorly functioning social protection and low productivity. Therefore, if we understand these synergies, we have an immense opportunity to redesign tax systems and improve social protection systems, moving forward on the side of equity and productivity.

Based on an interview with Santiago Levy