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ASAMBLEA PARLAMENTARIA EURO-LATINOAMERICANA

EURO-LATIN AMERICAN PARLIAMENTARY ASSEMBLY

ASSEMBLEIA PARLAMENTAR EURO-LATINO-AMERICANA

ASSEMBLÉE PARLEMENTAIRE EURO-LATINO- AMÉRICAINE

PARLAMENTARISCHE VERSAMMLUNG EUROPA-LATEINAMERIKA

Committee on Social Affairs, Youth and Children, Human Exchanges, Education and Culture

27.4.2017

WORKING DOCUMENTon tackling inequality through social cohesion policies in Latin America andEurope

Committee on Social Affairs, Youth and Children, Human Exchanges,Education and Culture

Rapporteur: Javi López

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Tackling inequality through social cohesion policies in Latin America and Europe

Nowadays Inequality trends within as well as between countries, both in Europe and in LatinAmerica, are a key political issue. Inequality represents a relevant challenge for inclusive andsustainable growth. The old-fashion economic concept on the need to sacrifice the fight againstinequalities to foster economic growth is no longer true. “There is an increasing understandingthat high and rising inequalities and the concentration of wealth have negative effects oneconomic growth as well as on social cohesion”1.

Therefore, the concept of equality of opportunity is inextricably linked with social inclusion,since it is a process that facilitates involvement in society and access to the opportunities itprovides for all individuals, poor and marginalised people in particular, enabling them to accessmarkets and services and participate in economic, political and social life.

The UN Economic Commission for Latin America and the Caribbean (ECLAC) defines socialinclusion as ‘the process for achieving equality’ and ‘closing gaps on productivity, capabilities(education) and employment/job segmentation/informality, which constitute the main causes ofinequality.’2

Equality and social cohesion are interconnected concepts. According to the OECD, a cohesivesociety works towards the well-being of its members, and combats exclusion andmarginalisation. In other words, it promotes social inclusion by creating a sense of belongingand offering its members a chance of upward mobility.3 IMF studies show that inequality actsas a brake on growth, while resource redistribution to reduce inequality has the indirect effectof fostering sustainable growth.

The political debate on inequality focuses on outcomes of income and wealth. When analysingeconomic inequality, we have to made distinction between income inequality (flows ofincomes) and wealth inequality (stock of economic resources). At the same time, Incomeinequality could be measured by market incomes or by disposable incomes, it depends if theyrefers to the gross incomes earned by individuals or households before taxes and transfers, oryou consider redistributive policies. Finally, it has to be outlined that Wealth inequality isnarrowly related with Income inequality: first because wealth represents the accumulation ofincomes over years and through inheritance and savings, and second because this wealth cangenerate complementary income and influencing inequality of opportunities and outcomes.

Inequality of outcomes drifts from differences in opportunities and in individual's efforts andtalents. Inequality of opportunity is linked to factor out of control of individuals (ethnicity,gender, nationality, social and economic family background etc.)

At the same time, the distributions of opportunities and of outcomes are closely linked. Unequalopportunities affect individuals' abilities to obtain income, and income and wealth inequalitiesaffect individual’s choices and performance.

1 Analytical Web Note 6/2015 “High and rising inequalities; what can be done about it at EU level?” EuropeanCommission DG EMPL2 Alicia Bárcena, ‘Equality and Social Inclusion’, February 20143 OECD: ‘Perspectives on Global Development 2012: Social Cohesion in a Shifting World’, Paris 2011

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Therefore, fighting against economic inequalities requires policies tackling unequalopportunities and market inequalities and address current income and wealth inequalities.

Latin America and the Caribbean: inequality and social cohesion at the heart of thepolitical debate

In Latin America, the most unequal region in the world, inequality occupies a significant placein national policy, focusing on key economic issues and their connection with poverty,inequality, redistribution, inclusion and growth. Social inclusion and cohesion policiesimplemented in Latin America and the Caribbean (LAC) in the past decade have helped lift61 million people out of poverty, reduced inequality and been instrumental in swelling the ranksof the middle class. Since 1990, poverty in LAC has fallen from 48% to around 28% of thepopulation, while extreme poverty levels have fallen to 12%Income distribution in LAC hasalso improved significantly in the past decade. While the poorest quintile earns an average of5% of total income the richest quintile accounts for 47% of total income.1 It should be notedthat, despite the remarkable reduction in poverty levels and the growth of the middle class,according to ECLAC, four out of 10 people continue to live in a precarious situation and couldslide back into poverty in the event of adverse economic conditions.

Experts say that reduced income inequality in LAC in the last decade is chiefly the result oftwo factors: reduced employment income inequality since the premium placed on qualificationshas fallen; and increased and broader conditional cash transfers, which have helped to boostnon-labour income. Over the past decade, social expenditure in LAC rose as a percentage ofGDP (18.6%) and overall public spending (62.6%), as a result of more extensive conditionalcash transfer programmes,.2 In particular, conditional transfers are designed to encourageparents to invest these funds in their children’s human capital. While access to high-qualityeducation is one of the key determinants of inequality, it continues to represent a majorchallenge for many LAC countries.Despite progress with reducing income inequality in LAC, inequality levels remain high andact as a barrier to sustainable growth and social cohesion. The current economic context doesn’thelp to improve the situation. After five years of deceleration, economic growth in LatinAmerica turned negative in 2016. Comprehensive data show that the region’s GDP contracted0.8% in 2016, after having virtually stagnated in 2015. It is expected that the region’s GDPgrowth will pick up to 1.5% in 2017 and regional economic activity should expand 2.5% in20183.

Another important factor that impacts both directly and indirectly on persistent inequality inLAC is fiscal policy. Tax collection is vital for public investment and for the implementationof social cohesion policies designed to close the gap in fields such as access to high-qualitypublic goods in education, health, transport, housing, drinking water and infrastructure.Public finances in ALC countries have traditionally relied on tax system based on consumptiontaxes and on a taxation policies with a weak redistributive impact. The tax system in most ofthe LAC countries raise much less from personal income tax than those of other countries.Revenue from personal income taxes has grown from 1% of GPD in 2005 to about 1,6% of

1 ECLAC: Social Panorama of Latin America 20152 Integración y cohesión social en las relaciones entre la UE y ALC, Seminar Framework Document, FIIAPP, 20103 Focus economics: Economic Snapshot for Latin America, March 2017

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GDP in 2015. Total tax revenues in ALC as a whole rose slightly in 2016, averaging 18,4% ofGDP. Despite this progress, fiscal revenues from personal income are still very small, even if anumber of countries implemented proportional taxes on capital income and progressive taxeson income system. The modest progress with personal income taxes also reflects the evolutionof the redistributive power.1.

Additionally, in 2015 and 2016, most of the LAC countries have adopted tax reforms oradjustments to their tax systems, while adopting measures to guarantee a greater taxcompliance, both domestically and internationally. These include anti-avoidance measures,regularization programmes, improved regulation of transfer prices, double taxation agreementsand a number of information-sharing agreements with other countries. Apart from personalincome tax, evasion in ALC countries affects also other taxes that are vital for the region, inparticular corporative income tax and value added tax. According to ECLAC, the region haslost about 340 billion USD (6.7% of GDP) in 2015 from tax evasion.

With this situation in mind, governments shall adopt a careful approach to the tax system andthe reforms to be implemented in order to use the full redistributive potential. This includes thestrengthening of the personal income tax and enhancing its revenue-raising and distributiveeffects. Such a comprehensive approach would have a positive effect on equity in terms ofability to pay and equity of tax treatment for individuals with equivalent income.

The European experience

Since the Treaty of Rome, the EU has created and implemented various financial instruments,funded from the EU budget, designed to strengthen social cohesion in the EU, with a view toproviding economic support for social cohesion in the Member States. It has defined commonsocial rights and minimum standards in a wide range of labour market-related areas, and hascommitted to promoting employment and social progress. In addition to other institutionsestablished in recent decades to foster social cohesion in the EU, such as the European SocialFund (ESF) the EU has created the European Regional Development Fund (ERDF) and theCohesion Fund, which aims to foster environmentally friendly growth and sustainabledevelopment. The overarching objective of cohesion policy is to stimulate competitiveness bypromoting growth and creating jobs.

In addition, the EU adopted in 2010 the Europe 2020 strategy, aimed to promote ”smart,sustainable and inclusive growth as a way to overcome the structural weaknesses in Europe'seconomy, improve its competitiveness and productivity and underpin a sustainable socialmarket economy , which set five specific targets for employment, innovation, education, socialinclusion and energy. In particular, the Strategy sets targets to lift at least 20 million people outof poverty and social exclusion and to increase employment of the population aged 20-64 to75%. To achieve those objectives and meet the individual development needs of each EUregion, EUR 351 billion was allocated to cohesion policy for the period 2014-2020 (almost athird of the entire EU budget).But, in Europe the fight against inequality is still a pending issue from a holistic perspective.

Firstly because Europe is still in the process of building a Social Dimension of its Union, which

1 Fiscal Panorama of Latin America and the Caribbean, ECLAC, 2017

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must mean a real completion of the Economic and Monetary Union in social terms. In thissense, the European Pillar of Social Rights, in process of being concretized by the Union, shouldbe a great opportunity to move forward with concrete measures and financial instruments tostrengthen the European social model and it should not be only a declaration of values andprinciples. And the Union efforts in in the fight against inequality has to be embedded in theEuropean Semester and it should go beyond policies against poverty and exclusion as it hasbeen done with the Europe 2020 Strategy which have not succeed tackling poverty andexclusion as a whole.

Secondly, because the economic policies and structural reforms imposed by the EuropeanUnion in the last decade as a way to recover economic growth have been focused only oncountries’ economic and fiscal imbalances but they failed to take into account imbalances andsocial consequences provoked by the crisis and by the measures of inflexible austerity imposed.

Thus, although before the crisis it seemed that upward convergence in economic and socialterms, both within and between European countries was a reality, the differences have grownagain both between and within countries since 2008.

In several European countries labour income inequality increased since the economic downturn,due to both rising unemployment and an increased dispersion of wages linked to extraordinaryspeed-up fiscal consolidation and labour market structural reforms which weakened workersand social rights and diminished Trade Union’s bargaining power and collective agreementscoverage. Globalisation and the so-called "skilled biased technological change" affected thewage distribution in favour of high-skilled workers At the same time, the demand for new typesof low skilled occupations increased, which led to a decline in the share of employment in themiddle of the skills distribution and a decrease in their relative wage. Changes in the world ofwork and increasing non-standard work has contributed to higher inequality, via precariouslabour conditions and lower wages. Increasing gaps in access to education and healthcare havebeen widening across Europe, too, affecting equal of opportunities and outcomes.

According to the latest data published by the European Commission1, 120 million people in theEU are at risk of poverty or social exclusion, including 27% of children and 20,5% elderlypeople. 9% of the European population live in severe material deprivation. The performancebetween the welfare systems in the EU countries varies between 60% of poverty risk reductionto the least effective system, where the risk of poverty is reduced by less than 15%.Additionally, 12 million more women than men live in poverty in the EU.

Analysing the consequences of the economic and financial crisis in Europe, we see that thecrisis was associated with an erosion of the long-run growth potential of poorer countries,therefore undermining their convergence potential. Bruegel has indicated that whileconvergence has slowed down during the crisis throughout Europe, within the eurozoneconvergence has not just halted but in some cases transformed into a logic of divergence. Thecrisis has been associated with declining standards of living: in just 9 out of the 28 countriesof the European Union were people wealthier in 2013 than 2007. Since2007, real GDP percapita has fallen by 20% in Greece, 15% in Cyprus, 12% in Ireland and 11% in Italy. Likewith Latin America, much of Europe (especially the periphery) has been mired in a lostdecade. The Italian case is particularly dismal: Italy has been approaching two lost decades,

1 http://ec.europa.eu/social/main.jsp?catId=751

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with productivity actually declining63. Economic crisis (recession) was associated64 withsignificant declines in both average and median wages. The growth performance65 of theEuropean periphery is reminiscent of LatinAmerica’s lost decade.

The contrast with the experience in Latin America remains striking. In the absence of asolid return to growth, both rates of poverty and inequality cannot be expected toimprove. But as noted, growth on its own is not enough. Without specificallyredistributive policies – as in the case of Latin America – inequality will not diminish.Specific actions to both improve the macroeconomic framework overall in Europe andintervene concretely at the national level in order to reduce inequality are needed.

EU-CELAC cooperation on social cohesion

In Latin America in the 1980s and 1990s, the concept of social cohesion scarcely featured inpublic policymaking; it was only in the late 1990s that growing concerns about incomedistribution and extremely high levels of inequality came to the fore. Conditional transferprogrammes were the first measures taken by Latin American governments to reduce povertyand inequality in the region. This new Latin American focus represented an opportunity for theEU to place greater emphasis on the issue of social cohesion in its relations with LAC. Fromthen on, the EU began to systematically integrate the concept of social cohesion into itsdevelopment policy with third countries, particularly the countries of Latin America and theCaribbean. Differing interpretations of social cohesion sparked a broad political and socialdebate, making the issue a fixture on the LAC political agenda of increasing importance in thenational and regional context.

The various integration processes within Latin America, and its openness to trade with the restof the world, have highlighted shortcomings related to territorial asymmetry and theconcentration of production and wealth in certain urban centres. As a result, countries in LatinAmerica have launched discussions about possible mechanisms for greater territorialdistribution, not only in the countries as a whole, but in different integration blocs (Mercosur,the Andean Community, etc.). However, no measure of that kind has yet been implemented sofar. In this context, the EU’s contribution may be a determining factor, both through the transferand exchange of experiences and good practice and through political and economic relationsand cooperation with LAC in the framework of the Bi-Regional Strategic Partnership.

While seeking and consolidating social cohesion principally a task for national governments,the external dimension remains important, giving rise to cooperation between countries in thesame region as well as between those outside the region. Bi-regional cooperation between theEU and LAC is not merely based on the desire for solidarity, but instead has a much broaderscope and purpose, creating increasingly integrated and cohesive areas for exchange. While thischallenge requires significant economic and political sacrifices from both stakeholders, in theform of major reforms required for more cohesive societies, the positive effects of such reformsbring significant benefits to both regions.

EUROsociAL: a contribution to social cohesion in LAC

Shared EU and LAC concerns about equality and social cohesion were reflected for the first

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time in the declaration adopted at the conclusion of the Guadalajara Summit in 2004. This ledto the launch of the EUROsociAL project, which aimed to effect meaningful change inpolicymaking with a view to improving social cohesion by means of exchanges of experiences,knowledge and best practice between the regions. Among the tasks accomplished during thefirst phase were the development of new public policies, incorporating new innovations intoexisting policies and institutional capacity-building for government agencies responsibleworking in this area.

The second stage of the EUROsociAL programme (2011-2016) at a time when the number oflow-income countries is falling and are ever more high-income countries; those countries willnevertheless face major challenges, such as heterogeneity, significant structural deficits,inadequate fiscal policies, youth unemployment and the challenges associated with migration.In this second stage, the EUROsociAL programme has made a considerable contribution topromoting political dialogue at regional level and, by using its networks, to addressing issuesboth regions have in common. To that end, the programme strives to promote regionaldevelopment and collective dialogue for consideration of priorities and strategic issues amongpartner institutions.

In October 2015, the Commission launched a new phase of the programme: EUROsociAL+. Ithas been allocated EUR 32 million in funding for the period 2016-2021, focused on threepriority areas: social policy, good governance and gender equality. The programme willcontinue to support public policies aimed at enhancing the social cohesion and thestrengthening of the institutions responsible for their implementation. Moreover, theprogramme will also address the root causes of inequality that pose major obstacle to the socialcohesion, while supporting social policies through the improvement of the quality ofemployment and of social protection systems.

To overcome inequalities requires good governance, which can help foster development ofmore inclusive, more responsive governmental systems that address the real needs of themarginalized populations. The programme will therefore promote efficient and transparentfiscal systems, equal access to justice and measures to reinforce social equality. Particularemphasis has been placed on issues of justice, regional development, public funding networks,tackling corruption and promoting equal opportunities for men and women.

ConclusionsDespite the heterogeneity of the EU and Latin America and the differences between them, thetwo regions are aware of the key role played by social cohesion in reducing inequality andinequity, through the creation of jobs, competitiveness, economic growth and sustainabledevelopment. In addition to funding contributions from national governments, cohesion policyserves as a catalyst for securing private funding by boosting investor confidence.

As a result of reforms undertaken in recent decades, LAC countries have made considerableprogress in reducing poverty and inequality. However, the majority of Latin American countriescontinue to face the common challenges of achieving development while boosting equality,delivering increased growth and reduced instability, consolidating democratic governance, andstrengthening the state, its institutions and its willingness to implement resource redistributionpolicies. This cannot be done without strong partnerships and political will, considerableinstitutional and administrative capabilities and rigorous control of social spending.

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International cooperation programmes have proved an effective tool for creating favourableconditions and boosting governments’ ability to implement policies to improve social cohesion.The EUROsociAL cooperation programme has contributed to this objective through anexchange of experiences, knowledge and good practice between the two regions. By promotingsocial cohesion in Latin America, the programme has made an important contribution toeconomic and social integration between the two parties, moving the EU and LAC closer to thecreation of a true Bi-Regional Strategic Partnership.