Chapter 1 The social contract in Latin America and the Caribbean: Situation and policy challenges This chapter illustrates the weakening of the social contract in the region, and aims to better understand its intricacies and the policy challenges and areas that are crucial for its strengthening. First, it presents evidence that suggests the growing disconnection between citizens and public institutions in Latin America and the Caribbean (LAC), which in turn is a sign of a weaker contract. This section argues that two factors could explain this growing disconnection: the rising aspirations of a middle class that has significantly expanded in the last decade, and the difficulties of public institutions to respond to new socio-economic challenges and guarantee greater well-being. The strength of the social contract is also assessed by exploring tax morale – i.e. the willingness to pay taxes – in the region. Second, it looks at how well-being has diminished recently in LAC, and suggests the need to rethink institutions to provide better opportunities and public goods and services and respond to citizens’ evolving demands, thus improving their well-being. LATIN AMERICAN ECONOMIC OUTLOOK 2018: RETHINKING INSTITUTIONS FOR DEVELOPMENT © OECD/UNITED NATIONS/CAF 2018 43 1. ThE soCIAL ConTRACT in LATin AmERICA AND THE CARibbEAN: SITUATion AND POLICY CHALLENGES The social contract in Latin America and the Caribbean: situation and policy challenges Latin America and the Caribbean witness a growing disconnection between citizens and the state Lower trust Low satisfaction with Lower tax in government public services morale Satisfaction rate 45% 41% 56% 25% TAX 2010 2017 Education Healthcare Trust in government Over 2006-16, More than half has fallen from a level the share of people of Latin-Americans of 45% in 2010 satisfied with were willing to to around 25% the quality of public evade paying in 2017 services also fell taxes in 2015 The unmet aspirations of a larger middle class are a key driver of the current social dissatisfaction 35% 40% In 2015, around 35% Dissatisfaction with ... while vulnerable of LAC population public services brings middle class and poor could be considered upper- and middle-class households remain consolidated middle households to move using low quality public class (21% in 2001), but towards better services, thus around 40% remains quality perpetuating social vulnerable private services... divides 44 LATIN AMERICAN ECONOMIC OUTLOOK 2018: RETHINKING INSTITUTIONS FOR DEVELOPMENT © OECD/UNITED NATIONS/CAF 2018 LATIN AMERICAN ECONOMIC OUTLOOK 2018: RETHINKING INSTITUTIONS FOR DEVELOPMENT © OECD/UNITED NATIONS/CAF 2018 45 1. ThE soCIAL ConTRACT in LATin AmERICA AND THE CARibbEAN: SITUATion AND POLICY CHALLENGES 1. ThE soCIAL ConTRACT in LATin AmERICA AND THE CARibbEAN: SITUATion AND POLICY CHALLENGES In recent years, the Latin America and Caribbean (LAC) region has witnessed a growing disconnection between citizens and the state. This is illustrated mainly by a decline of trust in public institutions and an increase of citizen dissatisfaction with public services. The rising aspirations of a larger middle class, coupled with the difficulties of public institutions to respond to persistent and new socio-economic challenges emerging from both the domestic and the global context, explain to a large extent this disconnection. These developments suggest a weakening of the social contract in LAC, with significant implications for people’s perception of well-being. The social contract can be broadly understood as a tacit pact between the state and citizens. On the one hand, the state enables people to make the most of their lives (through guaranteeing fundamental rights and ensuring a certain standard of material conditions and quality of life through the provision of public goods and services). On the other, citizens fulfil certain duties and obligations (such as voting and paying taxes) that underpin the effective functioning of democratic societies. Rebuilding the social contract is vital to foster higher well-being for all in LAC. To do so requires a rethinking of institutions to better respond to citizens’ demands and to bridge the gap with them. In LAC, declining levels of trust and satisfaction with public services suggest that citizens no longer believe that public institutions can respond to their demands. As a result, they do not perceive sufficient benefits linked to the fulfilment of their duties as citizens, but rather see fewer incentives to engage in the obligations associated with the social contract. This, in turn, undermines the capacity of the state to provide quality public goods and services effectively. This leads to a negative impact on citizens’ perception of well-being, which further fuels their disengagement from public institutions in a downward spiral. This chapter illustrates the weakening of the social contract in the region, and aims to better understand its intricacies and the policy challenges and areas that are crucial for its strengthening. First, it presents evidence on the growing disconnection between citizens and public institutions in LAC. The strength of the social contract is also assessed by exploring tax morale – i.e. the willingness to pay taxes – in the region. Second, it analyses how a stronger social contract is critical to achieve greater well-being, and argues that a rethinking of institutions is needed in the LAC region in order to achieve this goal by better responding to citizens’ demands and providing better public goods and services. The social contract has weakened in LAC owing to the difficulties of institutions to respond to the rising and evolving aspirations of society The widening gap between aspirations and perceptions suggests that the social contract has been weakening in LAC. The notion of the social contract is broad, although its strength can be measured through different indicators that help understand the vigour of the relationship between the state and society. Social contracts are generally characterised by a number of explicit and implicit agreements that determine what each socio-economic group gives to the state and what it receives back (Estefania and Martinez-Lillo, 2016). Citizens will only engage firmly in these agreements under three conditions. They must believe they are reliable (i.e. they trust state institutions), they must perceive these agreements are beneficial (i.e. they are satisfied with what they receive by engaging in them) and they must perceive the pact as fair (i.e. no one is favoured over others or benefits at their expense). Looking at the gap between social aspirations (what people would like to receive or what they demand from the state) and perceptions (what they feel they receive from engaging with the state) could reveal insights into the strength of the social contract. In LAC, both the indicators about perceptions and aspirations point to a weakening of the social contract in recent years. LATIN AMERICAN ECONOMIC OUTLOOK 2018: RETHINKING INSTITUTIONS FOR DEVELOPMENT © OECD/UNITED NATIONS/CAF 2018 45 1. THE SOCIAL CONTRACT IN LATIN AMERICA AND THE CARIBBEAN: SITUATION AND POLICY CHALLENGES Low trust and dissatisfaction illustrate the erosion of the social contract in LAC Trust in institutions is low in LAC and has deteriorated in recent years. On average in the last decade, 62% of the Latin American population had little or no trust at all in governments. Lack of trust in governments has deepened since the global financial crisis, reaching levels of around 75% in 2017, up from a level of 54% in 2010 (Figure 1.1, Panel A). Trust has decreased even in a context of a large decline of poverty rates in the LAC region (Figure 1.1., Panel B). Trust is usually understood as “holding a positive perception about the actions of an individual or an organisation” (OECD, 2017a). It is thus interpreted as having confidence that the actions of others will follow what is expected. In this respect, trust is a fundamental element for the success of public policies. Many such policies depend on co-operation and compliance of citizens, while many others assume the public will behave in a way that transforms these policies into successful action. There are different categories of trust: trust of citizens in governments; trust of governments in citizens; and trust among citizens. While the three are relevant for a solid social contract, the chapter focuses on trust of citizens in governments and in public institutions. Without trust, citizens do not perceive value in engaging in an agreement that may not be respected. Figure 1.1. Trust in governments vs. growth and poverty rates in Latin America Little or no confidence in government (left axis) Little or no confidence in government (left axis) Average GDP growth rate (right axis) Poverty headcount ratio at $3.20 a day (2011 PPP) (right axis) 90% 7 90% 30% 80% 6 80% 25% 70% 5 70% 60% 4 60% 20% 50% 3 50% 15% 40% 2 40% Percentage change Percentage 30% 1 of Percentage respondents 30% 10% Percentage of of respondents Percentage 20% 0 20% population the of Percentage 5% 10% -1 10% 0% -2 0% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Note: Unweighted averages for all variables for a sample of countries comprising: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela. Source: OECD/CAF/ECLAC based on data from IMF (2016), World Economic Outlook; World Bank (2017a), World Development Indicators; and Latinobarometro (2017). 12 http://dx.doi.org/10.1787/888933649696 Other indicators also suggest that citizens in the LAC region are losing trust in institutions. Overall in 2016, only 23% of Latin Americans said they were confident in the honesty of elections (compared with 46% in the OECD).