The way forward
The middle sectors in Latin America find themselves in a dilemma. They are a strong supporter of democracy as an idea, but also critical of how democracy actually works. A key source of this dissatisfaction is how public policies influence income distribution, social protection and opportunity creation. The middle sectors have the potential to become an agent of change in the region. Their centrist political values could facilitate the consensus building needed for the sort of structural reforms discussed in Chapters 2 and 3 – and if poverty reduction continues to advance, members of the middle sectors could soon represent an absolute majority in several countries of the region.
But this positive outcome will not materialise automatically. In many countries of the region, a large part of the middle sectors do not see themselves as part of the social contract. Willingness to pay taxes is low, reflecting perhaps the meagre public goods the middle sectors receive. The perceived quality of public services is also low and this drives the middle sectors to seek alternatives from the private sector, even where the extra cost is a significant additional burden on household budgets. This – rational – behaviour can perpetuate exclusion, with the disadvantaged having no choice but to use low-quality publicly provided services and the better-off having their own private arrangements. The social and economic consequences of this are large and enduring.
The current moment is in many ways very timely. Most countries in the region have weathered the international turmoil with increased confidence. Their renewed strength is due, in many cases, to expanding middle sectors which have served as a source of domestic demand. Poverty has fallen in many countries at a higher pace than during previous expansions, and the mechanisms that lie behind this, such as conditional cash-transfer programmes, have created a new faith in government action among the vulnerable segments of society. At the same time, democracy has advanced on many fronts and policy makers have become more pragmatic about economic policies. Parties of the left and right have alternated in power maintaining policy credibility and without creating panics about abrupt policy U-turns. However, these changes mean that policy itself must change. The successful policies of the past may no longer serve a changed population profile. This is a chance to renew the social contract – explicitly seeking to draw the middle sectors into it.
Because expenditure needs tax to support it, it is tempting to think of tax first. This may be the wrong way round. Given current poor perceptions, the best place to start may be reforms aimed at improving the quality of public services, so that current users increase their demand and support for them. This would build a social constituency for expansion of public spending and for the taxes necessary to finance it. A way forward here may be to frame tax reforms that raise more revenue while paying far more attention to the distributional effects. The bedrock for all of this should be continued improvements in tax administration and the transparency of public expenditure and revenues.