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15
From Safety Nets to Social Policy: Lessons for the Transition Economies from the Developing Countries

Carol Graham

INTRODUCTION

Few topics related to transition economies have been the subject of as much discussion as have the social costs of market-oriented reforms. Yet the empirical evidence upon which the debate is based is far from complete. This is due in part to the difficulty of comparing poverty lines across countries: poverty has both absolute and relative dimensions, and is quite different in Zambia than in Poland, for example. It is also difficult to distinguish the effects of prolonged economic crisis on the poor from those of difficult but necessary macroeconomic adjustments. Moreover, the truly poor and vulnerable tend to have a weak political voice, and therefore little influence on the debate about social costs. Not surprisingly, the numerous attempts to implement safety net measures during economic adjustment in both developing and transition economies have had varied results (Graham, 1994). This experience has led to an evolution of thinking about social welfare issues during transition, which has implications not only for the design of safety net measures in the short term, but also for the reform of social-sector institutions over the longer term.1

During the first wave of adjustment programs in the early 1980s, most attention was focused on developing the appropriate mix of policies to achieve stabilization and structural reform, and little attention was paid to the issue of

1  

This chapter focuses only on social-sector reform in the context of economic transition, and does not attempt a full-scale discussion of theories of institutional change. One of the most influential and comprehensive studies of institutional change is found in North (1990).



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Transforming Post-Communist Political Economies 15 From Safety Nets to Social Policy: Lessons for the Transition Economies from the Developing Countries Carol Graham INTRODUCTION Few topics related to transition economies have been the subject of as much discussion as have the social costs of market-oriented reforms. Yet the empirical evidence upon which the debate is based is far from complete. This is due in part to the difficulty of comparing poverty lines across countries: poverty has both absolute and relative dimensions, and is quite different in Zambia than in Poland, for example. It is also difficult to distinguish the effects of prolonged economic crisis on the poor from those of difficult but necessary macroeconomic adjustments. Moreover, the truly poor and vulnerable tend to have a weak political voice, and therefore little influence on the debate about social costs. Not surprisingly, the numerous attempts to implement safety net measures during economic adjustment in both developing and transition economies have had varied results (Graham, 1994). This experience has led to an evolution of thinking about social welfare issues during transition, which has implications not only for the design of safety net measures in the short term, but also for the reform of social-sector institutions over the longer term.1 During the first wave of adjustment programs in the early 1980s, most attention was focused on developing the appropriate mix of policies to achieve stabilization and structural reform, and little attention was paid to the issue of 1   This chapter focuses only on social-sector reform in the context of economic transition, and does not attempt a full-scale discussion of theories of institutional change. One of the most influential and comprehensive studies of institutional change is found in North (1990).

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Transforming Post-Communist Political Economies social costs. This situation had changed by the mid- 1980s. First, a consensus gradually developed on the appropriate policy mix: the reduction of fiscal deficits, the elimination of price controls and trade restrictions, the introduction of realistic and unified exchange rate regimes and positive real interest rates, and a shift to relying on the private sector rather than the state to run most productive enterprises. As this consensus became clear, policymakers could begin to focus attention on social welfare issues (Williamson, 1994). Second, by the mid- 1980s, as the results of adjustment policies became clear, a broad debate began about their social costs. Concerns about these costs were heightened by the publication of a highly critical study by the United Nations Children's Fund (UNICEF) in 1987 (Cornia et al., 1987). Initially, this debate focused solely on the social costs of adjustment policies and resulted in numerous efforts to develop safety net measures within the multilateral development banks. Yet by the late 1980s, the debate had been altered once again by evidence from country experience. It had become increasingly clear that the poor fared far worse in the countries that failed to adjust than in those that adjusted in a timely manner. The contrasting examples of Chile and Peru are illustrative. During the adjustment crisis in the early 1980s in Chile, the poor were effectively protected from declines in social welfare through targeted employment and nutrition policies. With the subsequent resumption of growth in the late 1980s and early 1990s, poverty decreased substantially, falling from approximately 45 percent of the population in 1986 to 28 percent in 1994. In contrast, in Peru, during a prolonged period of ''postponed" adjustment from 1985-90 that resulted in hyperinflation and economic collapse, per capita consumption fell 50 percent on average. It fell even further for the poorest two deciles-—over 60 percent. Poverty rates rose from 17.3 percent in 1985 to 54.7 percent in 1990 (Marcel and Solimano, 1994; Glewwe and Hall, 1994).2 In Africa, meanwhile, the few countries that successfully adjusted also had better records on the poverty reduction front than did nonadjusters (Demery and Squire, 1995; Bruno et al., 1996).3 Adjustment is a necessary but not a sufficient condition for poverty reduction, however, and there are still many unanswered questions. The first of these is the relationship between poverty and inequality, and here the evidence is far less convincing, although some recent work clearly suggests that poverty increases with inequality (Birdsall and Londoño, 1997). Another important area that is increasingly recognized as critical to poverty reduction, but in which we have very little empirical evidence, is that of institutional reform 2   Poverty figures for Peru are for Lima only, and would be much higher if data for rural areas were available. 3   Data for Africa are extremely limited as a result of both the limited availability of household-level data and the small number of successful adjusters.

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Transforming Post-Communist Political Economies (Graham and Naim, 1997). Nevertheless, it is very difficult either to reduce inequality or to implement institutional reform in the absence of growth. And while some countries that adjust, such as Bolivia, grow more slowly than others, such as Peru, because of resource endowments, institutional structure, and a variety of other factors, adjusters outperform nonadjusters overall with regard to growth and poverty reduction. There are two reasons why nonadjusters perform poorly as regards poverty reduction. First, cross-country evidence demonstrates a clear relationship between growth and poverty: poverty declines during periods of growth and increases during periods of recession (Bruno et al., 1996; Morley, 1995). While adjustment has short-term costs, its ultimate objective is to achieve sustainable growth. Thus countries that adjust successfully also tend to reduce poverty. Beyond the issue of adjustment, empirical evidence suggests that countries that maintain market-oriented macropolicies over time, and in particular liberalized trade regimes, grow much more rapidly than those that do not, regardless of initial conditions (Sachs and Warner, 1995). Second, while adjustment has costs for certain sectors, it provides a coherent policy framework within which one can identify and protect vulnerable groups. In contrast, it is very difficult to protect poor and vulnerable groups in a haphazard policy framework, where macroeconomic distortions and high inflation erode real income levels and provide numerous opportunities for rent seeking. The poorest tend to be the least able to protect themselves from the costs of inflation, while the wealthy are better positioned to pursue strategies such as sending assets abroad. At the same time, the poor are less able than the wealthier to use economic distortions for personal profit, for example by speculating on exchange rate differentials. Thus the debate has shifted somewhat, from an emphasis on short-term safety nets to one on appropriate macroeconomic policies, coupled with longer-term investments in health and education. Recent research exploring the long-contested relationship between inequality and growth has found that investment in longer-term social welfare policies, education in particular, has positive effects on growth and therefore poverty reduction (Birdsall et al., 1995; Benabou, 1997). The effects on growth of transfers—a category that includes safety nets—are mixed, and seem to depend on the nature of the transfers and how they are allocated (Benabou, 1997). This should come as no surprise, since the ability of safety nets to reach the truly poor and vulnerable depends to a large extent on the political context and on the administrative capacity in particular country settings. This does not diminish the important role safety nets can play as transition tools, but does emphasize the importance of evaluating investments in safety nets in the broader context of social policy. From both political and administrative standpoints, it is much easier to set up short-term safety net programs than it is to implement reforms of the public-sector institutions that deliver basic services. At least in Latin America and

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Transforming Post-Communist Political Economies Africa, this greater ease, combined with concern about the immediate costs of adjustment, may have resulted in too much emphasis on safety nets at the expense of attention to the latter institutions. A brief review of selected experiences with safety net policies in the next section helps explain the changing nature of the debate on the social costs of adjustment. The chapter then turns to an examination of the politics of reforming the social-sector institutions that deliver public services. The discussion in these sections provides relevant lessons for the transition economies, many of which have made far less progress either in implementing effective safety nets or in reforming social welfare institutions than have countries in other regions. The final section presents a brief conclusion. SAFETY NETS: LESSONS FROM EXPERIENCE The cross-regional record of safety nets is mixed. In some cases, safety net programs have been able to reach the poor and vulnerable and contribute to the political sustainability of economic reform at the same time. Yet in other cases, they have merely been short-term palliatives to stave off the political opposition of vocal groups, and have had little impact on either poverty reduction or the longer-term political sustainability of reform (Graham, 1994). There are two reasons for this mixed record. First, the overall policy framework is critical. Safety nets cannot serve as poverty reduction tools—or even provide effective social welfare protection—in the absence of policies to generate sustainable growth in the long run. Safety nets are short-term mechanisms that can play an important role during transition periods. The benefits they provide, however, such as short-term unemployment and income support, cannot substitute for macroeconomic reform and sustainable growth on the one hand, and for basic social welfare policies, such as primary health and education, on the other. And safety nets must complement rather than contradict the general direction of the macroeconomic reform program: they should not generate fiscal deficits or create labor market distortions.4 In practice, safety nets have not always been implemented according to these principles. The second reason for the mixed record of safety nets is that their implementation is not free of political constraints, and there are distinct trade-offs involved in directing benefits to the politically vocal versus the truly needy. The conventional wisdom, and usual practice, is that the poor have a weak political voice, and governments in the process of implementing reform and facing intense political opposition have few incentives to focus safety net benefits on the poorest. In addition, the poorest are often not as directly 4   Wages paid in employment programs, for example, must be below the market minimum so they do not serve as disincentives for seeking alternative employment in the private sector.

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Transforming Post-Communist Political Economies affected by adjustment measures as are slightly better-off urban consumers. Thus governments tend to respond to this political trade-off by focusing most of the benefits of compensation efforts during reform on vocal rather than needy groups. Yet it is not necessarily cost-effective, from either a political or poverty reduction perspective, to concentrate all benefits on vocal opponents of reform, as they are unlikely to be as well off as they were prior to reform regardless of the level of compensation. In contrast, reaching groups previously marginalized from public benefits is likely to have greater political as well as poverty reduction effects. This is more likely to occur if benefits are distributed in a manner that incorporates the participation of beneficiaries, thereby increasing their political voice as well as their economic potential. Examples are provided by numerous countries' experiences with demand-based social funds (Graham, 1994). Such a dynamic is not always possible, however, and there are political contexts where governments must expend a fair amount of resources in order to placate vocal and organized opponents of reform, or reforms will be politically unviable and face reversal, an outcome that tends to be far worse for the poor. There are positive examples of countries in which extensive macroeconomic reforms have ultimately generated growth, and in which safety nets have been an important part of the reform process. The models for successful safety nets differ. The contrasting examples of Chile and Bolivia demonstrate how the choice of a safety net program reflects different political and institutional contexts. In Chile, reform was implemented under an authoritarian regime and in a highly developed institutional framework. The government was able to rely on a preexisting and extensive network of mother and child nutrition programs and target those programs to the poorest sectors. A series of public works employment programs was also targeted to the poorest by keeping the wage level well below the minimum. Public social services were restructured to benefit the poor, and private alternatives were introduced for those who could afford them. While per capita social expenditure decreased during the crisis years, it increased for the poorest deciles (Graham, 1994). These safety nets were critical to protecting the welfare of the poor during deep recession. Unemployment, for example, peaked at almost 30 percent of the work force in 1982. Yet welfare indicators such as infant mortality not only continued to improve, but accelerated in their rate of improvement during the crisis years. Chile's record was possible because of its extensive preexisting social welfare system and its relatively efficient public-sector institutions. Political context also played a role: a democratic government might face greater obstacles to reorienting social welfare expenditures to the poorest at the expense of the middle sectors than did the Pinochet regime. Yet it is important to note that the targeted approach has been maintained and even extended since the transition to democracy in Chile (Arriagada and Graham, 1994).

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Transforming Post-Communist Political Economies Bolivia, in contrast to Chile, had much higher levels of poverty and far less developed institutions at the time of reform. The government implemented the Emergency Social Fund (ESF), a demand-based social fund (the first of its kind) that relied on proposals from beneficiaries to allocate projects and on local governments, nongovernmental organizations, and the local private sector to implement them. While the ESF was not able to target the poorest sectors, as they were the least able to present viable project proposals, it was able to reach large numbers of the poor at a critical time (1 million people out of a population of 7 million benefited from ESF projects). At the same time, the ESF provided important impetus to the building of local organizational and institutional capacity. Since the "completion" of adjustment, the ESF's successor, the Social Investment Fund, has relied on the same basic principles, but focusing specifically on health and education benefits rather than on short-term employment and incorporating collaboration with the line ministries into its operations (Graham, 1992). This is an attempt to overcome one of the primary drawbacks of social funds: while operating outside the realm of the mainstream public sector is precisely what makes social funds flexible and rapid, it also means they do not contribute to reform of the public sector. Both Chile's experience with targeted social policies and Bolivia's with the incorporation of beneficiary participation have helped shape the debate on safety nets, as well as social welfare policy more generally. The Chilean experience emphasizes the importance of targeting safety net efforts (and social policies) to the truly needy in order to provide effective protection, whereas the Bolivian experience demonstrates the importance of incorporating the participation of the poor and local institutions in order to enhance the sustainability of poverty reduction efforts. There are also numerous examples of countries that have failed to implement comprehensive reform and whose safety net policies have neither led to sustainable poverty reduction efforts nor reached needy groups. One such experience was the DIRE program in Senegal, a country that has postponed important structural reforms for over a decade. DIRE, a credit program designed to help laid-off civil service workers and unemployed university graduates during adjustment, channeled interest-free loans to these groups without incorporating need criteria or project viability into the allocation of loans. Not only did the resulting projects have an extremely high failure rate (32 percent), but over $3 million was lost or "filtered" through the public bureaucracy. This is hardly an efficient manner in which to allocate resources in one of the poorest countries in Africa, nor did it contribute to sustainable reform. DIRE's failure was due to poor design, as well as to the priority of political over poverty reduction objectives. In addition, and perhaps most important, because the program was not part of a government commitment to a comprehensive macroeconomic reform effort, it was not sustainable in either economic or political terms.

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Transforming Post-Communist Political Economies While safety net efforts in adjusting countries have a mixed record, the experience provides some important lessons, both for future safety net policy and for social welfare policy more generally. The effectiveness of targeted social safety net benefits has highlighted the extent to which the allocation of basic social services, such as health and education, is skewed toward wealthier groups in many countries, as well as the need for better targeting of social welfare benefits in general. While social expenditures must be at a realistic level—and in many countries in Latin America these expenditures fell well beyond desirable levels during the debt crisis—the allocation of expenditures is as critical as overall amounts, if not more so. In Brazil, for example, only 18 percent of the poorest groups, who account for over 40 percent of the population, are covered by social security, and they receive only 3 percent of social security benefits. In Venezuela, over 50 percent of the education budget is spent on higher education (Birdsall and James, 1990; Angell and Graham, 1995). Chile, in contrast, provides a good example of how social expenditures can be made far more effective in reducing poverty when they are targeted. With the transition to a democratic regime in 1990, the targeted approach of the military government was maintained, while social expenditure was increased at a rate of almost 10 percent per year. Because the demand of upper- and middle-income groups for social services was now served by the private sector, government increases were able to benefit the poor disproportionately. As noted above, poverty has fallen markedly in Chile: from 45 percent in 1986, to 40 percent in 1990, to 28 percent in 1994—and is projected to fall to 17 percent by the year 2000 if the economy maintains its current trajectory of 6 percent annual growth (Cowlan and de Gregori, 1996). Bolivia, meanwhile, provides an important example of how the incorporation of beneficiary participation can lead to more sustainable poverty reduction efforts, and in particular enhance local institutional and organizational capacity. In Bolivia, the demand-based approach is now being extended to reforms in the education sector, in addition to the Social Investment Fund's cooperation with the ministries. In many other countries, however, social expenditure remains skewed to wealthier groups. As noted earlier, public focus on the social costs of reform and on short-term safety net measures, particularly in the absence of progress on macroeconomic reform, can divert attention from necessary reforms in the mainstream social sectors. Precisely because many safety net programs are implemented outside the mainstream public institutional framework, they avoid addressing difficult problems within it. This underscores the importance of implementing safety nets in a broader context of macroeconomic reform. When safety net measures are implemented effectively, and introduce key principles such as targeting of the poorest and beneficiary participation, they can provide impetus—as well as some guiding principles—for the broader process of social-sector reform.

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Transforming Post-Communist Political Economies THE NEXT STAGE: THE POLITICS OF REFORMING SOCIAL-SECTOR INSTITUTIONS While there are clearly political trade-offs involved in the implementation of safety nets, the politics of implementing permanent reforms of the institutions that deliver public services are even more complex. Reform of such institutions requires more implementation capacity than does either macroeconomic reform or the implementation of safety net measures, and entails very different political dynamics. The providers of public services tend to be politically powerful and highly organized, while the users, although numerous, tend to be diffuse and poorly organized. It is no surprise that most governments, already faced with the political challenges of macroeconomic reform, postpone or avoid more difficult reforms of public institutions, particularly when the implementation of visible safety net policies can address public concern about social welfare issues, at least in the short term. Yet in most countries that complete adjustment programs, it becomes evident that for growth to be sustainable in the long run, there are no alternatives to reform of the social sectors. In much of Latin America, for example, public attention has shifted from the costs of adjustment measures to concern about the quality and quantity of basic public services, particularly health and education. Despite these difficulties, it is possible to make progress in reforming social-sector institutions, and to do so under a democratic regime. In Latin America, Chile is the country that has made the most progress in implementing structural reforms of the social sectors, and it has done so under authoritarian rule.5 Yet the reforms have been maintained and even extended since the 1990 transition to democracy. And since then, a number of other countries in Latin America—and a few in Africa—have implemented "Chile-style" reforms under democratic regimes. Progress has been most visible in the social security arena in Latin America, but there have also been some reforms in health and education.6 The policy framework—rapid and extensive macroeconomic reform—has been critical to the political viability of these reforms 5   East Asia also provides several examples of efficient and well-targeted social expenditures, in particular investments in basic education (see Birdsall et al., 1995). Yet because the East Asian countries were neither democracies nor undergoing major economic adjustments at the time their social welfare frameworks were established, their experiences are less relevant to the transition economies. Indeed, most East Asian countries have not had to reform their social welfare systems dramatically; rather, they were initially set up in an efficient manner in the context of good macroeconomic policies. Pension systems, for example, were not established in most East Asian countries until it was clear that they were affordable from a fiscal standpoint. This is in sharp contrast with the experience of most Latin American or transition economies. 6   Argentina, Bolivia, Colombia, and Peru have all implemented major social security reforms. A major health-sector reform is under way in Argentina, and Peru is beginning such a process. In Africa, among other countries, Zambia has implemented far-reaching health-sector reform (Graham, 1996a).

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Transforming Post-Communist Political Economies (Graham, 1994). Extensive economic change provides governments with unique political opportunities to implement additional reforms in the social welfare arena as it undermines the position of established interest groups, which often monopolize the benefits of public services at the expense of the poor (Adrianzen and Graham, 1974; Angell and Graham, 1995). Slow or stalled economic reform, in contrast, allows such groups greater political opportunities to maintain their privileged positions. In addition to the political opportunities provided by reform, there are already low expectations of the state in much of the developing world, which also makes it easier for governments to introduce change. Poor management over time, coupled with the fiscal constraints imposed by the economic crisis and debt problems of the 1980s, resulted in a deterioration of the quality and coverage of basic public services in most countries. Upper- and middle-income groups that could afford to do so have shifted to private systems, leaving the poor and lower-middle-income groups as the primary users of public services. This reduces the potential opposition to reforming public systems, yet at the same time highlights the importance of social service reform for poverty reduction. Integral to the sustainability of such reform efforts is altering the political balance so the beneficiaries of reform have a stronger voice in the political debate. Many of the successful reform efforts have included explicit or implicit efforts to create new stakeholders in reformed systems. Chile's education reform, for example, which introduced choice between public and publicly subsidized private schools, created substantial numbers of new stakeholders in the private education system. Zambia's health reform, by devolving responsibility for management and resources to local-level actors, has similarly created new stakeholders who have proven to be capable of resisting central-level efforts to reverse the reform process. The Peruvian government is attempting to build support for the privatization process by selling off a portion of public company shares through a "citizen participation" program, which allows low-income investors to buy shares in installments at low interest (Graham, 1996b). The Bolivian government is planning a similar scheme, which will distribute 50 percent of the proceeds from privatized companies to all adult Bolivians as shares in a new private pension scheme. While these are positive trends, there is a great deal of room for progress. East Asia's early investments in basic education, coupled with sound macroeconomic management over time, are now paying off in the form of higher sustained growth and lower levels of poverty than in other regions (Birdsall et al., 1995). Latin America's progress on the macroreform front in recent years has been impressive. It is only now turning to the social investment side of the equation, and results will take time. Chile, which began its process of reform in both these arenas much earlier than the other countries in the region, is now seeing results in terms of both growth and poverty reduction. Other countries

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Transforming Post-Communist Political Economies will follow suit, but only as they complete both sides of this policy equation. Thus social-sector reforms will be critical. Most countries in Africa, meanwhile, with a few exceptions, have yet to implement the macroeconomic reforms that can make social-sector reforms economically and politically possible. LESSONS FOR THE TRANSITION ECONOMIES The record of safety nets and social policy reform in the developing world is relevant for the transition economies, although the contexts are quite different. First, the macrotransformations in the transition economies are necessarily far more extensive than are the adjustments in developing countries. In many cases entire work forces must be deindustrialized. Existing social welfare systems, many of which are run by public enterprises rather than the central government, are fiscally unsustainable and are not designed to cope with poverty and unemployment resulting from the transition to the market. This obviously makes it more difficult to provide effective safety nets. One potential approach for safety net policies in such a context is to concentrate specific programs on pockets of high unemployment, where social funds or public works could alleviate negative welfare effects, and at the same time to target the universal system of social welfare benefits, such as monetary allowances, to particularly vulnerable groups, such as children in large families. Under the current structure, these benefits are universally provided, but because of fiscal constraints, their real value is marginal and eroding further. Targeting these benefits to vulnerable groups would allow governments to raise the benefit levels enough to reduce poverty without adding to the fiscal burden. Second, the politics of the process are more complex in the transition economies: there are higher expectations of the state; reform has stalled in many cases; and the concerns of some politically influential groups, such as pensioners, dominate the public debate, while very little attention is paid to the situation of even needier and more vulnerable groups, such as the children of the working poor. The public debate on social welfare in the transition economies has mistakenly focused on two issues—the plight of pensioners and the pace of reform—while excluding several equally critical concerns. Pensioners have fared worse than the average in some countries (most notably the countries of the former Soviet Union) and better than the average in others (the Eastern European countries). In general, not all pensioners are vulnerable, and it is elderly pensioners living alone who are at risk. In contrast, children in large families, most of which have at least one parent working, are the group most likely to be poor in all the transition economies (Milanovic, 1997; Braithwaite, 1995). The debate about rapid versus gradual reform has focused on the high

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Transforming Post-Communist Political Economies social costs purportedly associated with rapid reform. Yet in the countries that have pursued rapid reform and been able to implement it fully—Poland, Czechoslovakia, Estonia, Latvia, and Albania—inflation has been reduced quickly, and growth has begun to recover, which will have consequent effects on poverty reduction (Åslund et al., 1996).7 In large part reflecting the extent to which production under central planning failed to reflect genuine consumer demand, output declined markedly in the initial reform stages in these countries. Gradual reformers have merely postponed these inevitable declines, and now lag far behind the faster reformers in terms of recovering growth. In addition, contrary to common assumptions, gradualists have not fared better in the political arena: more of them have been voted out of office than have their radical counterparts (Åslund et al., 1996).8 In few countries has the debate focused on social-sector reform. And even in the strongest-performing radical reformers—Poland and Czechoslovakia for example—attempts at social-sector reforms, such as pension reform, have stalled because of political opposition. Only Estonia, which for several years had the most promarket government of the transition economies, has moved ahead with pension reform. Yet progress in this arena is critical. No other region has experienced a deterioration of basic social welfare indicators, such as infant mortality and life expectancy, like that experienced by the transition economies. In addition, as a result of demographic as well as economic changes, existing systems are simply not sustainable from a fiscal standpoint. Pension systems in particular, which account for the bulk of social expenditures in most transition economies, are likely to present the most immediate financial crises in the absence of social security reform. Pension spending as a percentage of gross domestic product (GDP) ranges from 5 to 6 percent in Russia and the Baltics to 12 percent in Poland and Hungary (The Economist, 1994). 9 The debate over social-sector reforms in the transition economies resembles the stalled debates over social welfare reform in the OECD countries. Yet the social welfare and financial situations in the transition economies are far more fragile. And a Catch-22 type of scenario is also at play: the maintenance of current social welfare systems in many countries is part of the explanation for stalled reforms. Under the enterprise-based social benefit system, 7   Russia attempted radical reform, but the reformers were ousted from the government before the reforms could take hold. 8   Radical reformers have lost elections primarily in situations where proreform forces have been less united than the former communists. And even where this has been the case, as in Poland and Estonia, reforms have not been reversed. 9   These figures are for 1992. The implicit debt of Ukraine's pension system, for example, is 214 percent of GDP. Among Organization for Economic Cooperation and Development (OECD) countries, only Italy's debt, at 242 percent, is higher. Hungary's is 172 percent, Japan's is 144 percent, and the United States' is 89 percent (see Kane, 1995).

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Transforming Post-Communist Political Economies workers lose access to social welfare benefits if they become unemployed. This is one of the principal reasons managers are reluctant to lay off redundant workers, keeping them on the payroll even if they do not work or get paid so they can maintain access to critical benefits such as health and education services (Pinto et al., 1992). While it is evident that social systems in transition economies need reform, there is no clear example in the region to which countries can turn. Recently, even the highly successful Czech prime minister, Vaclev Klaus, faced an electoral setback over the social-sector reform issue. Having lost his majority in parliament by a narrow margin, he now needs to make extensive efforts to build a new coalition of support for his reform agenda (The Economist, 1996).10 Some OECD countries, such as Italy, have attempted to implement social security reform, yet because the reform was watered down as a result of union opposition, it is likely to be far less effective in either providing better pensions or reducing the government's implicit debt. Other countries, including the United States and France, are debating the issue, but with little progress to date. The rapid reformers in the transition economies should look to Latin America, not the OECD countries, for examples. Chile is by far the world's leader in the social security reform arena; its complete switch to an individual contribution-based system is credited with substantially increasing that country's savings capacity (Corsetti and Schmidt-Hebbel, 1995).11 Now other countries, such as Peru, Colombia, and Argentina, provide hybrid models to examine in addition. Rapid reformers should also capitalize on the political context: it is much easier to implement far-reaching change while the overall policy framework is in flux, and interest groups have yet to establish clear positions (as in the Latin American examples), than it is to do so in a status quo policy framework (such as that of the OECD countries). Before concluding, two tactical points are worthy of note. The first is the need to alter the political balance through strategies that create new stakes in the process of reform. Czechoslovakia, with its voucher privatization strategy, provides a prime example of such a strategy. While many observers criticize the measure from an economic efficiency standpoint, virtually all observers concur that the program was key to building widespread support for the privatization process, thus making it irreversible. In contrast, in Russia, voucher privatization was poorly implemented, allowing insider traders to dominate the process and monopolize the benefits, further delegitimizing the 10   Social welfare reform (health and pensions) was a major issue in the parliamentary elections in June 1996. While Klaus's party received a higher percentage of the vote than it did in 1992 (44 versus 42 percent), it received fewer parliamentary seats, which went to the Christian Democrats in three industrialized regions. 11   Private-sector saving in Chile increased from nearly zero in 1979-1981 to an average of 17.1 percent of GDP in 1990-1992.

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Transforming Post-Communist Political Economies process of reform in the public mind. Chile's social security reform was based on the concept of creating new stakeholders in the private system. Explaining and selling the reform to potential participants was key to its success, even in an authoritarian context.12 This points to the second critical tactical component of reform: government communication. Effective government communication has been key to the success of macroeconomic and sectoral reforms in a variety of contexts (Graham, 1994). It is particularly critical in the transition economies, where public anxiety about the social costs of reform is high, and understanding of the market process and of the potential benefits of social welfare reforms is very low (Graham, 1995). The misguided debate on poverty in the transition economies noted above is a case in point. An effective government communication policy, aimed at explaining and selling reforms to the public, will be key to any successful social-sector reform effort in these countries. For example, if the public understood that the trade-off for increasing expenditures on pensions might well be a reduction in immunizations for children, the debate over social-sector reform might be more likely to lead reform. CONCLUSION There is no clear recipe or model for successful social-sector reform in the transition economies. Yet there are valuable experiences in the developing world, particularly in Latin America, with both safety net policies and social-sector reform that are far more relevant for the transition economies than are the experiences of the OECD countries. Several conditions necessary for effective safety nets and for social welfare policy emerge from these experiences. First, in the absence of a sound macroeconomic policy framework, no social welfare reform is likely to succeed. Second, targeting social expenditures to the poorest sectors makes them far more effective from a poverty reduction standpoint. Third, there are major political obstacles to reallocating expenditures to the poorest, but a context of rapid and far-reaching macroeconomic reform provides governments with political opportunities for doing so. And political opposition can in part be overcome with strategies that involve the beneficiaries in the process of reform, thereby creating new stakeholders. Finally, effective government communication with the public will be critical to any reform effort. 12   Based on author's interviews with Jose Pinera, Minister of Labor and Social Security at the time the reform was implemented, Washington, DC, and Santiago, June-July 1996.

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