The Informal Economy, Insecurity and Social Cohesion in Latin America

By Tokman, Víctor E. | International Labour Review, January 1, 2007 | Go to article overview
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The Informal Economy, Insecurity and Social Cohesion in Latin America

Tokman, Víctor E., International Labour Review


Most Latin American countries adopted the welfare state as a model, though developing it in very different ways and, often, imperfectly because of structural differences between them and the industrialized countries. Social protection coverage is still patchy, with many informal-sector workers not covered and widespread public feelings of insecurity. The author examines the complicated structural and labour situation and the latest ideas in Latin America and the European Union to strengthen social cohesion. He analyses approaches to incorporating the informal sector into the modern sector, addressing social exclusion, combining flexibility for employers with security for workers, and achieving near-universal social protection.

Social cohesion is an attribute of countries which have successfully achieved economic progress and redistributed the fruits of that growth to the whole of society. Thus, social cohesion helps ensure fairer development and involve all the population in efforts to achieve that growth, each according to his/her skills. The welfare state laid down the bases of post-war economic expansion in a social system that included all social classes and provided levels of security and stability enabling a systemic approach to the problems of vulnerable groups. Integration and security were achieved through full employment, the protection of the labour force and solidarity throughout the whole social system.

The welfare state model served as a guide for the policies adopted by most countries in Latin America, though it was implemented to varying degrees, and often imperfectly, given the structural differences distinguishing these countries from developed countries. Social protection is still limited and the needs of nonwage earning groups are inadequately provided for (Tokman, 2006, pp. 10-17).

A recent study by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) defined social cohesion as the dialectical relationship between mechanisms of social inclusion/exclusion and people's reactions, perceptions and attitudes to the ways in which these mechanisms operate in producing a sense of belonging to society (ECLAC, 2007a). Social cohesion provides the causal link between mechanisms of integration and well-being and individuals' feeling of belonging to society. With this approach as its starting point, this article will focus on the analysis of labour market participation, social protection and public perceptions of the effectiveness of existing instruments. In developing countries, notably those of Latin America, the degree of labour market integration varies very considerably, and is linked to marked disparities in productivity and the presence of a large informal economy, where the majority of the active labour force works.

The first part of this article briefly considers the main consequences of economic liberalization for labour. Then, the problems presented by the informal economy and by precarious employment generally are examined. The third part focuses on social cohesion strategies to address precarious forms of labour market participation. The last part deals with the "flexicurity" approach, that is, attempts to combine enterprise flexibility and worker security.

Open markets and their impact on labour

Changes in the macroeconomic regime within which countries operate as a result of the opening-up of markets and the liberalization of trade have meant that employment is more closely linked to external demand and that the scope for expanding internal demand or increasing wages above productivity levels is limited. The international economy is more integrated, the financial aspects have become more important, and information technologies are changing fast. As a result, the benefits of these developments have an immediate effect - but so do their disadvantages.

Long-term instability in Latin America, expressed in terms of the volatility of gross domestic product, is twice that of an industrialized country and higher than that of the countries of South-East Asia.

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