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Uruguay: Poverty Assessment: Public Social Expenditures and their Impact on the Income Distribution

Uruguay 1993 PA
(Official Use Only)

Main Report (10Mb PDF)

Poverty Profile

Uruguay has long been a pioneer in the provision of social welfare benefits in Latin America. Given this fact and given the country's relatively high income per capita (roughly US$3300 in 1992) and rather equitable income distribution, poverty is not widespread compared to other countries in the region. Fewer than 10 percent of the households in Montevideo (where almost half of the country's population lives) fall below the poverty line, while in other areas, the proportion is 11 percent. A majority of poor households are situated in rural areas and in migrant communities on the outskirts of Montevideo. The poverty line for Montevideo is estimated to be US$58 monthly per capita and in other urban areas to be US$45. A review of the demographic characteristics of the lowest income group reveals that a large proportion of poverty in Uruguay is concentrated among families who are at the reproductive stage of their life-cycle, whose children, therefore, have little access to education, potable water, and sewerage systems.

Incentive and Regulatory Framework

The Government of Uruguay has made progress towards putting in place an efficient incentive and regulatory framework, including carrying out reforms to liberalize international trade and capital markets. These policies have led to increases in real wages and salaries and a significant reduction in unemployment, thereby helping to reduce poverty. However, changes are still needed to increase the provision of government services and to reduce the size of the state. Inflation remains high since the inflation tax (which falls disproportionately on the poor) is needed to maintain fiscal balance, and labor markets not only show severe rigidities in many areas but also labor is heavily taxed to cover social security needs.

Public Expenditures

According to a survey of public social expenditures, social programs, mainly in the form of free health and education benefits, and pension and retirement cash transfers account for 54 percent of the incomes of the poorest households (first decile of income distribution). For the lowest income households, free health services account for close to 23 percent, and social security payments for 16 percent of gross income. Nevertheless, public sector spending on social programs needs to be restructured, especially in the housing and education sectors, which mainly benefit upper-income groups. Therefore, redirecting benefits to low-income groups involves abolishing subsidies for middle- and upper-income groups and making recipients completely accountable for borrowed funds. In the area of social security, reducing the government's participation could entail a shift from the current pay-as-you-go system to a capitalized system. Specific recommendations include an increase in the proportion financed by upper-income families and establishing a system of individually-owned special funds (fondos complementarios). Additional reforms that could be undertaken to cut social security expenditures in the short to medium term include raising the retirement age to 65, lowering the wage replacement ratio, and reducing public employment. Finally, reforms of the health sector should aim to replace the Social Security Bank, through which payments to medical health organizations are channeled with direct arrangements between employers/workers and medical health organizations, especially for public health services that focus on low-income groups.

Safety Net

The Ministry of Labor and Social Security through the National Food Institute (INDA) provides food to families in dire circumstances under its National Food Program. This program reaches the highest number of people (about 100,000) and is coordinated with periodic preventive health screening. Its beneficiaries are evenly split between Montevideo and the Provinces. INDA also provides traditional dining hall service for those with low incomes through its Collective Food Assistance Service, and supplies food to public and private institutions of a charitable or religious nature through its Institutional Food Supplementation Service. The Ministry also provides food supplements through the Rural Community Action Program and distributes milk at reduced prices to low-income families. These programs are well administered and reach the majority of the poorest households.

Poverty Strategy

Poverty alleviation in Uruguay must rely heavily on creating the conditions for higher sustainable growth. For the past three decades, economic growth has been limited, and social sector spending as a proportion of GDP has been steadily increasing. However, the burden of continuing to provide social benefits has encroached upon Uruguay's productive capacity, creating conditions under which poverty could increase. Clearly, a redefinition of social welfare programs is needed, which would entail significantly improving the targeting of the programs. Besides improvements in the provision of government services through adequate targeting, efforts to alleviate poverty must also include the private sector. Private institutions could participate in the management, supervision, and provision of social benefits to the poor in a number of different ways. In the education sector, private banks could provide loans and scholarships to ease the financial burdens of university students from low-income families, while tuition should be charged to higher-income students. In the area of social security, fondos complementarios could be managed as private "mutual funds", while private health care coverage of the uninsured poor should be encouraged. Finally, privatizing Montevideo's water supply is recommended to enhance efficiency and eliminate cross subsidies among categories of users in the country.

Statistical Systems

The country's main source of data is a 1989 sample survey of public social expenditures. Information on household income was obtained from the regular nationwide household survey conducted periodically by Uruguay's Statistical Office. However, it appears that there is serious under-reporting of income by the different income groups, and survey specialists and data analysts have adjusted the figures to take this into account.

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