The reform of the social sector: statism, inequality and privatisation by default

Fernando Filgueira
Plataforma Social Watch Uruguay

The Uruguayan case shows the benefits of state perseverance and public assets and the adverse effects of privatisation by default. Although an attempt has been made to attribute the crisis to this statist emphasis, the present collapse of the economy and its social effects are basically the result of a financial system that lacks adequate monitoring, a marked deterioration of industry, a foreign exchange rate that damages the country’s competitiveness, and the vision of a country regarded as a financial and service market.

Socialsecurity: the costly defence of the old system and subsequent turn toprivatisation

In1995, Uruguay reformed its social security system. It changed from a system ofstate allocation to a mixed system including private agents and obligatorylevels defined by individual contributions. The rights and benefits ofpensioners in the previous system were not affected, and from 1985 to date, thequality of the benefits has improved.[1]The first pillar of the new regime is not a system of capitalisation but ofallocation; everybody has to contribute with part of their income and the systemremains a state monopoly. While the social security law enables theadministration of capitalisation funds through the Social Security InvestmentFund Administrations (or AFAPs) to be in the hands of private agents, the Stateis also present with its own AFAP and presently holds over 50% of marketparticipation. Furthermore, 80% of AFAP capital must be invested for a certainlength of time in state treasury bonds. Finally, this reform includesretirement, disability and pension benefits alone. The Social Security systemalso includes unemployment benefits, family allowances, and non-contributionpensions that remain within the state administration, financed as before.Although this reform shows a clear departure from the old system, it remainsstatist and committed to some objectives abandoned by some other countries,where governments have abdicated their social responsibilities.

Education:the stubbornness of public assets

Onthe return to democracy, state education, once the pride of the nation, wasrightly seen to be faltering. Meagre salaries for teachers, unsuitablefacilities, large classes, curricula not adapted to the needs of the market, anda considerable number of parents who had chosen to take their children out ofthe system and seek private alternatives—these were some of the most salientsymptoms of a sweeping crisis.[2]In 1995, one year after the last election, the most ambitious reform project waslaunched. The main features of this reform were:

·        The attempt to extend universal coverage to five-year-old children andprogress towards universal coverage for four-year-olds;

·        Drastic changes in secondary school curricula, removing emphasis fromhumanities and arts and increasing practical content, to prepare students forthe labour market rather than for university;

·        The expansion of the number of full-time schools in socially deprivedareas;

·        The recovery of an institutional dimension for middle-level stateeducation (grades 7 to 9), lost for over 25 years due to many factors (includingthe shrinking of timetable modules, mass enrolment, and the frequent rotation ofteachers).

Health:privatisation reform by default

TheUruguayan health system is a complex linking of public and private agencies.Historically, one may distinguish the private system (mutual medical benefitfunds) that provided health care to the middle and upper classes, and with time,to part of the working class; and a public system, covering those who could notafford the mutual medical benefit funds. During the 1960s and the 1970s, throughbilateral agreements between state agencies and mutual benefit funds, a systemwas created whereby civil servants could become members of a private healthcaresystem by means of a small salary deduction. In this way, the state startedsubsidising the mutual benefit funds and the healthcare costs of its employees.During the 1970s, some laws and agreements opened the door for the firstcategory of private workers to enter a similar agreement.

In1984, the mechanism became universal when the last category of workers in theformal sector (rural and domestic workers) acquired the right to subscribe to amutual benefit fund. This obligatory health insurance was managed by a new stateoffice, the Board of Social Security for the Sick (DISSE), which played the roleof mediator between the worker and the chosen fund. By 1988, according to theMinister of Public Health, 1,400,000 people were members of the mutual system.The public system continued to attend to approximately one million people andwith the addition of some private or public institutions (the military hospital,medical services of state companies) coverage of the Uruguayan population waspractically complete.

Theimplementation of agreements between the state and the mutual benefit funds andthe establishment of DISSE increased healthcare coverage, with a strongredistributive inclination: the amount of money paid out from the salary tobelong to a mutual benefit fund is proportional to that salary. However, giventhe increase in costs for the user in the co-payment established to controlconsumer use, it is less clear what proportion of the lower-income sectorsincorporated in the system were able to make use of it.

Moreover,this process of incorporation of new sectors introduced tension in the mutualbenefit funds. These funds were already suffering from financial problems beforethe system was implemented and the mass incorporation of new members throughDISSE exacerbated them. The solution was a strong state subsidy to sustain theoperation of the mutual fund system. Although coverage in the better qualityservices increased, their quality dropped on increased enrolment and loss ofresources. Some costs were passed on to the members of the mutual benefit fundsin terms of increases in medical fees.

Duringthe 1980s, a third form of medical service appeared on the scene: the privatemedical emergency units. These services used a pre-paid monthly fee, enablingthem to have very low registration costs while redistributing costs and risks. Alarge proportion of the middle classes and practically all the upper-middle andupper classes became members of these services.[3]  

Thefinal result is a stratified system of three layers: those who cannot pay healthcare or who can pay very little and end up in a stagnant or declining publicsystem; those who only pay for a mutual benefit fund system that is in cleardeterioration; and those who are members of a mutual benefit fund but can alsoafford the new emergency and medical assistance services. The continuousdeterioration in the quality of the public health system and in the mutualbenefit fund system has recently generated a fourth layer of care: privateinsurance and purely private health care.

Achievementsand constraints of social reforms

Thethree models of reform in these sectors show three different results. Educationchose a statist and redistributive model. Social security was ambiguous:defending the public system in 1989 and then partially accepting theprivatisation model in 1994. Health chose no reform or more strictly, aprivatisation reform by default. Uruguay as a whole was a rebellious reformer.Achievements are positive in the state model (education), ambiguous in the mixedmodel (social security) and clearly negative in the model of reform by default(health).

Interms of education, enrolment in early education rose from 30% at the beginningof the 1990s to 80% at the end of the decade. Those who most benefited from thisexpansion were the poorest 40% of the population. The learning levels infull-time primary schools in the most underprivileged social contexts improvedsignificantly above the national average, and the degree of repetition in allthe grades dropped. Finally, the most criticised point of this reform, thechange in secondary education, shows a 10% lower drop-out rate than the oldmodel, achieving a greater degree of retention of young people from the mostunderprivileged social sectors.

Regardingsocial security, the adoption of the constitutional amendment of 1989, made itpossible for the real value of pensions to double in a decade, taking almost 35%of the people of 65 years of age and over out of a situation of poverty andreducing poverty among older people to a minimum level.[4]However, this increase in pensions was given to all the sectors in equalproportions, making it an enormous drain on public expenditure and limitingother types of spending, in particular programmes geared for children. Finally,the 1994 reform with the system of allocation and capitalisation will furtherincrease inequality and cause serious problems in covering the lower incomesector, informal or part-time employment and women. Although the reform thatdefends the old system, shows problems of inefficiency, inequality and negativeeffects on the treasury, the major risks for the social future of pensioners areto be found in the second reform wave, where the greatest risks to socialintegration and protection of the most vulnerable sectors are appearing.

Finally,health shows the worst results. The system ended up by being subsidised by theState in its private dimension, without this implying an improvement in thequality of service. The medical corps and the laboratories are those who havemost benefited from the considerable expansion of public and private expenditureon health. In the meantime, the poor sectors have seen the deterioration in thequality of their public service, while the middle and upper sectors buy a newrange of stratified health services on the market.

Theevidence available over a decade shows a widening gap between expenditure onpublic health and subsidising of the mutual benefit fund system, more disparitybetween the salary of a public system doctor and one in the mutual benefit fundsystem, a significant increase in private health expenditure, a mass exodus fromthe mutual system due to the loss of formal employment that had previouslygenerated the membership benefit and an increase in the cost and use of the feesystem (for check-ups, appointments and drugs) whereby the mutual benefit fundslimit the use of the system and finance their chronic deficit.

Theabsence of a basic national health insurance for the whole population, debatedbut never implemented, has led to an increase in expenditure, with noimprovement in quality but with an increase in inequity. Recent events supportthis diagnosis. Recently, a measure was approved whereby those who are membersof a mutual benefit fund through DISSE cannot receive care in the public healthhospitals. In many of these cases, the beneficiaries cannot afford the price ofthe fees in the mutual system; thus, the system leaves them without a real rightto any health coverage. Furthermore, the mutual benefit funds have entered aspiral of increasing indebtedness and have threatened bankruptcy, demanding moremoney from the system, which despite its own indebtedness, has been cannibalisedby other state treasury requirements.


Defenceof public assets and of the state as guarantor of these assets has shown itselfto be socially more effective than privatisation alternatives. In a context ofeconomic collapse, the fault is placed on the old welfare state andprivatisation winds are again blowing, as observed in the privatisation of basicservices such as water in some sectors of the country. However, the reform ofthe social sector, particularly through statist and non-privatising options, isthe only buffer remaining to help the humblest people face the economic collapseof the past two years (see box). If a market option had been chosen for thesocial sector, the abandonment of the lower income sectors would have been muchmore dramatic.

The financial crisis

In the year 2002, the neo-liberal model promoted by the conservative governments of the past decades seemed to be in its death throes in Uruguay. The Argentine debacle and the contraction of the Brazilian market were the final blows to this weak structure. The financial system, the only sector of the economy to achieve positive results throughout the process, was unable to stand up to the combination of serious errors in the leadership of the Central Bank, episodes of corruption and the unvarnished theft of funds perpetuated by the bank owners. Uncertainty and lack of confidence led to a bank run that no one knew how to halt, and to a massive system-wide crisis; four banks suspended operations, thousands of investors were swindled, the state bank operations decreased, the chain of payments was interrupted, bankruptcies multiplied, savings and credit vanished and unemployment drifted out of control towards a historic 20% rate. Tax collection has shrunk; the economy has become more informal and, as of the last quarter, well-founded doubts about the state’s capacity to meet its foreign and domestic obligations have become general. The ghost of default is floating over to the other side of the Rio de la Plata.

The IMF and the World Bank, pressed by the Bush administration in the United States, rushed to resolve the situation. Their assistance was over USD 3 billion, an amazing amount given the small size of the Uruguayan economy. Devaluation arrived, reaching 80% in two months; the GDP fell swiftly and the debt/product ratio reached an impossible 90%.

Civil society reacted calmly and with maturity, contributing solutions that no one had thought of. The seriousness of the bank trade union (AEBU) and the amazing response by investors who rapidly organised themselves and proposed and consented to the capitalisation of part of their savings to save the banks in crisis, contrasted sharply with the improvisations and vacillations of the government and its allies.

Despair is rife and Uruguayans once again are taking the path of emigration. Surveys report on the continued growth of the left wing, now comprising over 50% of prospective voters. This crisis calls for an essential political agreement to provide leadership by consensus for the two years remaining to the present government.

Carlos Abín


[1] A social movement made up of pensioners was able to gain citizen support and in 1989, by means of a plebiscite, achieved an amendment to the constitution whereby in future pensions would be adjusted in accordance with the salary increments of state employees and would be increased in the same proportion as the mean salary index.

[2] During the first administration, no attempts were made at structural reforms beyond increasing attention to schools in poor neighbourhoods. The Lacalle administration (1990-1995) followed this trend and developed a system whereby some schools in neighbourhoods where basic needs were not satisfied were defined as “priority attention” schools and the teachers’ salaries were increased as an incentive.

[3] The mutual benefit funds were particularly slow and inefficient in terms of minor emergencies and treatment and in general with services unrelated to hospitalisation. In fact, all those who could afford it, paid double health care (or were subsidised in one system and paid for the other): the mutual benefit fund and the mobile emergency service.

[4] Between 4% and 6% according to the Economic Commission for Latin America and the Caribbean (ECLAC).

Fernando Filgueira has a PhD in Sociology from the Northwestern University, Illinois. He has worked as a consultant for OAS, IDB, UNICEF, Cinterfor/ILO and ECLAC.