Social-investment funds have been implemented
regionwide to combat the rising poverty associated with
structural adjustment. These funds do little, however, to
address the structural causes of poverty.
During the 1980s and 1990s, structural-adjust-
ment programs crafted by the International
Monetary Fund (IMF) and the World Bank had
dire social consequences. They adversely affected not
only low-income groups but the middle class as well.
Government budget cuts and price increases of basic
foodstuffs led to a dramatic decline in purchasing power.
Privatization and the deregulation of labor markets
resulted in rising un- and underemployment rates and
the growth of the informal economy. Trade liberaliza-
tion and policies favoring exports led to the ruin of many
small farmers, feeding migration to the cities and the
swelling of already bloated shantytowns. By the year
2000, it is estimated that seven out of every ten Latin
Americans will live below the poverty line. Hand-in-
hand with this growing pauperization is the concentra-
tion of income in the wealthiest 10% of the population.
Many observers began to question the compatibility
of neoliberal restructuring and its profound social costs
with efforts to consolidate democratic rule in the region.
Multilateral lending institutions such as the World Bank
and the Inter-American Development Bank (IDB), as
well as United Nations development agencies, have also
become increasingly concerned about the politically
destabilizing effects of increasing poverty. As a result,
these institutions began to emphasize the need to devel-
op specific social policies to accompany the structural-
adjustment programs. Neoliberal policy makers did not
question the viability of the structural-adjustment pro-
grams; rather, they considered poverty-alleviation
programs to be a necessary complement to them.
“Social reform, instead of a residuum, is an indispens-
able condition of economic efficiency and viability,”
reads one report by the IDB and the UN Development
Program (UNDP). “Only in an environment of social
and political stability is it possible to attract long-term
oriented investment…. For political stability and democ-
ratic consolidation, it is imperative to build up the con-
ditions that will expand and deepen the relationship of
solidarity and social responsibility.”‘
Discussions of how these social-policy measures
should be structured were interlaced with growing crit-
icisms of the deficits of traditional state social-security
systems in Latin America. Traditional social-security
systems, which provided coverage to wage earners,
benefited only one segment of society and failed to
reach the growing number of unemployed or those
laboring in the informal economy. Budget cuts over the
past decade undermined these public welfare systems,
as did corrupt government management in many coun-
tries. Social policies that directly targeted the most mar-
ginalized groups of society, it was argued, would make
the best use of scarce financial resources.
A crucial distinction must be made, however, be-
tween “structural poverty” and “new poverty.” The
development banks are concerned with the new poor,
who have been expelled from the formal economic sys-
tem as a direct result of the structural-adjustment pro-
grams and the ensuing contraction of the economy. This
group includes fired workers, young people who cannot
find employment, and pension holders. The banks do
not deal with structural poverty, which refers to those
sectors of society who remain outside or are excluded
NALIA REPORT ON THE AMERICAS
Karin Stahl is a political scientist who teaches at the University of Heidelberg in Germany.
32REPORT ON SOCIAL POLICY
Children in their home in Barrial, Honduras.
from the formal economic system, and have minimal
access to formal employment and education.
Faithful to its neoliberal underpinnings, the World
Bank conceptualizes poverty as a temporary phenome-
non. Once economic growth resumes, the new poor will
supposedly be reintegrated into the formal economy.
Consequently, the principal World Bank recipe for reduc-
ing poverty consists of stimulating economic growth.
Sustainable, permanent social-security nets are consid-
ered superfluous. “Economic recovery, stimulated by
economic stabilization and deregulation, is the basis of
the poverty-alleviation strategy,” according to a World
Bank document discussing the establishment of a social-
compensation fund in Peru. “However, in the short run,
the poor are likely to be adversely affected by the struc-
tural-adjustment program…. Social-compensation pro-
grams, such as employment generation and food aid, can
complement the two main elements of a poverty-allevia-
tion strategy-the promotion of broad-based growth, and
improved and more equitably distributed social ser-
vices.” 2
Social-investment funds (SIFs) are a centerpiece of
the World Bank’s new social policy. They are con-
ceived of as temporary mechanisms to mitigate the
most devastating effects of structural adjustment. The
first SIF was created in 1985 in Bolivia as part of the
World Bank-sponsored adjustment program. Since
then, SIFs have been established in nearly every Latin
American country that has implemented structural-
adjustment policies. While the SIFs vary somewhat
depending on the specific national context in which
they operate, they are structured according to a com-
mon mold.
The funds’ stated priorities are emer-
gency employment programs (building
or repairing infrastructure projects like
bridges, schools or roads, which pro-
vides short-term employment), social-
assistance programs (such as food aid),
and promoting productivity (credits,
assisting small enterprises, and worker
training). In practice, however, spending
tends to focus on short-term measures
like emergency employment and aid
programs. With rare exceptions, little
emphasis is given to creating productive
employment or attacking the roots of
structural poverty. By concentrating
resources on infrastructure develop-
ment, the funds are in effect financing a
component of state social spending that
had deteriorated dramatically due to
severe budget cuts in the 1980s.
The SIFs were designed to be
autonomous institutions subordinate
only to the president. They operate independently of the
state bureaucracy, which ostensibly gives them greater
flexibility, efficiency and transparency in the handling of
resources. The SIFs are financed largely by multilateral
lending institutions, UN agencies, and Northern govern-
ments and private aid agencies. In most cases, only a
small percentage of the total budget of the SIFs comes
from local governments. Even though funding is pre-
dominantly international, the strict control exercised by
the executive permits governments to use the SIFs as
tools of political patronage, especially around election
time.
Resources are distributed according to an application
process in which local groups and organizations solicit
funding for a specific project within the funds’ estab-
lished guidelines. The SIFs themselves do not carry out
social programs or projects. The funds operate more as
development banks that finance projects implemented
by groups in civil society. While the SIFs presumably
are aimed at helping the poorest, the application process
actually favors local groups, professionals and NGOs
that already have experience formulating and imple-
menting projects. NGOs often become mediators
between the state and the target groups, and derive
financial benefits from the funds.
he Honduran Social Investment Fund (FHIS) is a
typical example of how the SIFs operate on the
ground. It was created by the UNDP in 1990 to
alleviate the social costs of the structural-adjustment
program implemented that same year. Of the 5,494 pro-
jects funded between 1990 and 1994, 70% were short-
term infrastructure projects, including the maintenance
Vol XXIX, No 6 MAY/JUNE 1996
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33REPORT ON SOCIAL POLICY
and construction of roads, bridges, schools, health clin-
ics, water pipes, and sewerage. Social-assistance pro-
grams comprised 19% of the funded projects, while
productive projects accounted for only 7% of total
spending. 3
These public-works projects, which had been
neglected in recent years due to government budget
cuts, have been implemented in close cooperation with
the corresponding government ministries. The FHIS,
however, goes beyond just supplementing the work of
the ministries; it is increasingly being used to substitute
for functions and duties that the government ministries
used to perform. The FHIS, which is largely funded
from international credits and loans, thus releases the
Honduran government from fulfilling some of its basic
responsibilities.
It is doubtful whether the FHIS benefited the most vul-
nerable groups in society–those purportedly targeted by
the fund. In 1991, only 10% of the approved projects in
Honduras were located in the six poorest departments of
the country, while nearly 58% were concentrated in the
wealthiest five departments. Urban areas were also
favored, even though the poverty rate is much higher in
rural areas. 4 The poorest of the poor did not benefit from
the FHIS in part because of their relative lack of experi-
ence in formulating projects, administering resources,
and organizing in general. This neglect was also due,
however, to the political manipulation of the FHIS by the
ruling National Party, which channeled government
spending to the well-populated urban areas, where most
voters live, in anticipation of the 1993 elections.
This clientelistic manipulation of the FHIS has alien-
ated many NGOs that initially collaborated with the
fund. These organizations have accused the government
of using the FHIS to assert state control over NGOs and
social movements. The highly centralized control of the
FHIS by the president, and the lack of grassroots and
NGO participation in administering the fund, have also
given rise to charges of corruption within the FHIS.
he Chilean Solidarity and Social Investment
Fund (FOSIS) is an example of an alternative
way of structuring poverty-alleviation programs
that is more effective in terms of reaching the intended
A worker from a non-governmental organization teaches residents
Santiago shantytown how to care for a vegetable garden.
target-groups. The FOSIS was founded in 1990 to com-
bat poverty-which, despite the much-touted “success”
of the Chilean neoliberal economic model, had nearly
doubled between 1970 and 1990, from 17% to 34% of
the urban population. 5 Perhaps most significantly, the
FOSIS was established as a permanent feature of state
social policy, rather than an institution that would
become obsolete once neoliberal policies took root.
Moreover, it was subordinated to the Ministry of
Planning and Cooperation rather than under the direct
control of the president. Finally, it was conceived as a
complement to, rather than a substitute for, other social-
policy measures.
The FOSIS is different from other SIFs in its program
priorities as well. While most SIFs in Latin America
emphasize short-term strategies of emergency employ-
ment and assistance programs, the FOSIS has adopted
a long-term perspective to address the structural causes
of poverty. As a result, the FOSIS has given priority to
the funding of credit, training and marketing programs
for small enterprises (33%) and self-help capacity-
building in poor communities (33%). Training and
technical assistance to small farmers and indigenous
communities (16%) and capacity-building and training
programs for young people (18%) have also been
important components.
The FOSIS has been more effective than many tradi-
tional SIFs in targeting the poorest sectors of society.
Compared with the social-investment fund in Honduras,
for example, the FOSIS financed more projects in the
poorest regions of the country. 6 The FOSIS was embed-
ded in a wider government anti-poverty program which
targeted 71 communities that suffered extreme poverty.
Nearly 40% of the projects funded by the FOSIS were
carried out in these communities. 7 However,
the FOSIS has retained the same application
process as the traditional SIFs, so poorer
groups with little project-writing experience
are less likely to get funding than more
organized groups or intermediaries like
NGOs. As in Honduras, NGOs in Chile
remain wary of the fund, afraid that receiv-
ing government funding from the FOSIS
might jeopardize their autonomy.
The experience of the social-investment
funds in Latin America has revealed that
creating temporary institutions to deal with
growing poverty is inadequate. As the case
of Chile suggests, the SIFs can be more
effective if they are conceived of as long-
term programs that address the structural
problems of poverty. In general, however-
even in Chile-the poorest of the poor do
in a not benefit from the SIFs. Indeed, the
demand-driven model of the SIFs leads to
competition among the poor for scarce resources,
fomenting fragmentation among the poor instead of
social solidarity.
The external funding of the SIFs is also problematic.
Many of the funds are highly dependent on grants or
loans from Northern governments, private aid agencies,
and multilateral lending institutions like the World
Bank and the IDB. Thus, the continuity of these pro-
grams depends on securing international funding in the
future. The FOSIS in Chile, which has become largely
independent of these external funding sources, is a
notable exception. In general, however, there are no
guarantees of funding in the medium term, leading the
SIFs to focus on short-term emergency programs. This
growing dependency on foreign resources is contribut-
ing to the “denationalization” of social policy in many
Latin American countries. At the same time, financing
social policy with foreign loans will increase Latin
America’s large and looming debt burden, even if the
World Bank lends money at relatively low interest rates
for social programs.
In many cases, the existence of the SIFs leads to the
deterioration of existing state social agencies. The case
of Honduras reveals the tendency for governments to
use the SIFs to supplant traditional government min-
istries, releasing the state of its most basic obligations
to society. The external funding of social policy takes
the pressure off political elites and national govern-
ments to use social reforms and redistributive policies
to reverse the growing inequalities in the region. Not
only do the SIFs not contribute to a progressive redis-
tribution of wealth, but they serve to legitimize neolib-
eral economic policies that have increased income con-
centration and polarization in Latin America.
Anti-Poverty Programs
1. Inter-American Development Bank and the United Nations
Development Program, Reforma Social y Pobreza (New York: IDB
and UNDP, 1993), pp. 6, 9.
2. World Bank, Peru: Social Development and Compensation Fund
(FONCODES) Project (Washington, D.C.: World Bank, 1993).
3. Honduran Social-Investment Fund (FHIS), El rostro humano de la
revoluci6n moral, 1994.
4. L.A. Fuentes, “El Fondo Hondureho de Inversi6n Social: una
nueva modalidad de gesti6n pOblica,” in Fondos y Programas de
Compensaci6n Social: Experiencias en America Latina y el Caribe
(Washington, D.C.: PAHO, 1992), pp. 185-225.
5. Economic Commission on Latin America, Gasto piblico corriente
y gasto piblico de capital en servicios sociales: un andlisis cuanti-
tativo de los paises sudamericanos en los ochenta, LC/R, 962
(Santiago: CEPAL, 1990).
6. Solidarity and Social investment Fund (FOSIS), Memoria FOSIS
1994, 1994.
7. FOSIS, Memoria FOSIS 1994.
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