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Chapter Summary

Graham, Carol. 1998. Private Markets for Public Goods: Raising the Stakes in Economic Reform. Washington DC: Brooking Institute Press.

Chapter 3: Social Services, Social Security, and Privatization in Peru

Despite President Fujimoris successes with resolving Perus economic problems, the reform of public sector institutions that provide basic services remains on Perus agenda. Reducing poverty and improving the average Peruvians capacity to participate in market-oriented growth are necessary objectives. Graham explores how attempts to create new stakeholders in market reform in Peru can provide a basis for reform of public sector institutions. She concentrates on reform in three kinds of public institutions: education and healthcare services, social security, and state-owned enterprises.

Graham reveals the difficulties in reforming main line public agencies such as education and healthcare due to fear of political opposition and unwillingness to devolve authority. Subsequently, Graham reviews the successes in reforming semi-public institutions such as social security and state-owned enterprises which had the Presidents support and were based on dividing the goods among citizen stakeholders.

Graham asserts that the reforms of the pension program and the Citizen Participation Program (a program encouraging participation in share buying of state owned enterprises) were successful because the public goods involved were divisible among the citizens, who then became stakeholders and investors in those services. The semi-public institution reforms were also politically feasible for the Peruvian government because they had little political opposition due to the small numbers the institutions served. It is important to note that while these programs achieved the most success, they did not serve extremely poor Peruvians. Major reform efforts of main line ministries, such as education and healthcare, did not succeed because they serve the majority of the population and provide social welfare benefits, as opposed to direct financial benefits. As a result, these reforms conjured up a large amount of political opposition and Presidential support evaporated. The contrasting experiences of the three reform efforts reveal that reforms in semi-public institutions are easier to implement but cannot substitute for reforms of public institutions that offer basic services to the majority of the population, including the poor. It is the latter reforms that are crucial to the longer-term sustainability of market-led growth and will improve the capacity of the poor to participate in growth as stakeholders.

Education: Fugimori backed away from any proposals dealing with the privatization or decentralization of education after his proposed comprehensive reform of the education system almost cost him the October 1993 referendum. The reform was based on Chiles municipal administration policy and voucher-based subsidizing of both public and private schools. (See Chile). Since then, progress in education reform in Peru has been limited to infrastructure improvements.

Healthcare: Reform of healthcare was implemented at the local level through Committees for Local Social Administration (CLAS), which were given legal and financial responsibility for administering the health posts in their jurisdiction. They were provided with public funds to pay for the personnel and this allowed the facilities to contract with other doctors and remain open longer hours. All revenues collected from service fees are kept in the CLAS rather than sent to regional authorities. Their success reveals the vitality of community initiative in Peru and the strong potential for creating local-level stakeholders in reform. A drawback is that CLASs influence is limited to the local level because it has no point of entry into the larger public health system. It also has not reached the poorest of the population.

Social Security: Both pension reform and privatization of state owned enterprises increased the number of stakeholders in the reforms, encouraged savings and investment, and provided valuable experience with participation in newly emerging capital markets. Ultimately, these actions contributed to the political sustainability of reform. The pension program (based on private alternatives) was largely successful because the President supported it and because it covered only 2 million workers (1 million who stayed with the public plan and 1 million who switched to the private plan). Because the pension program only covered a small part of the total work force, rather than an entire population, opposition was limited to weak labor unions. As a result, reform was politically feasible. The public plan was pay as you go while the new plan administered individual accounts based on investment. It offered no minimum and the contribution rates were higher which resulted in younger and richer people switching to the new plan. Advantages of the new plan were having life insurance, being able to contribute to ones own retirement, and being able to retire earlier than the official age. Those who stayed with the public plan did so mainly because of lack of experience with savings and/or lack of access to information. The new plan was reasonably successful in attracting workers from one forced saving plan to another, but 70% of the work force in the informal sector remains outside either system.

Privatization of State-owned Enterprises: Similar to the pension reform program, the Citizen Participation Program, designed to encourage participation in share buying of state owned enterprises, received immense support from the President. Executive commitment provided sufficient resources to attract a good technical team for the Citizen Participation Program and the President provided important publicity for the program. The program was designed to reach lower-income investors by pricing the shares inexpensively. The minimum purchase was 515 soles, or US $234, and the maximum was 3,090 soles, or US $1404. An aggressive marketing campaign targeted low-income investors, especially in provinces outside of Lima. Over half a million investors participated in the Citizen Participation Program which made the reform more politically sustainable.