 Hello, good evening everybody. Let me first begin by thanking Kunal for this very nice and generous introduction. But most importantly, Kunal for inviting me to give the 23rd lecture of wider. It's really a privilege to be here. Also I wanna thank the Graduate Institute in Geneva for hosting the lecture. It's a pleasure to be in this lovely hallway and in this lovely building. Meeting all friends from the IDV, meeting Google and making some new friends. So I'm really very pleased to be here and I thank you all for listening to me. So I will try to use some slides and walk you through some slides. Basically what I wanna talk about are the complications and the challenges of social protection and economies that have large informal sectors. Most of my experience is from Latin America. Most of my own empirical work is from Mexico but I will quote work from other people that have also done research in Latin America. And Mutatis Mutandis, I think a lot of what I have to say is useful for economies in Africa and economies in East Asia. So the first thing I wanna do is we use the word social protection in many expressions and sometimes in my view we don't use it with sufficient precision. So the first thing that I wanna do is I wanna make a distinction between social assistance and social insurance. I wanna make a distinction because the objectives and the target population of social insurance programs and social assistance programs sometimes also called targeted poverty programs are different. In the case of social insurance, what you're trying to provide is insurance against risks. People can get ill, people can die, people can get disability, people can get unemployed, you don't know when you're gonna die, you don't know when you're gonna get sick. So the risks and even if all the population had exactly the same income, you would need insurance because there's uncertainty in the world and that's the role of insurance. So even in a society, I don't know Switzerland, Sweden, you know, Norway, very equal societies, you would need social insurance because you wanna pull risks and the instruments by which this is done in most Latin American countries is by something that we'll call contrary social insurance, I'll come back to in a minute. That is different from social assistance or poverty programs in which first the objective is different. The objective is to transfer income to somebody who is below some threshold, some poverty line or something or some poor. And by definition, a country cannot subsidize itself, the objective population is a subset, it's just a poor. And then the instruments that you can use to do this can be programs like targeted programs like the one Kunal was describing for Mexico like Progresa, but it could also be other types of program. The important point here is what you're trying to do is transfer income and you're only doing it to a subset of population. That's social assistance different from social insurance which is for everybody and which is basically pull risks. So with that distinction, what I wanna do is first talk a little bit about the problems of social insurance, then talk about the problems of social assistance in the context in which there's a lot of informality and then sort of offer a little bit of a pathway out. Okay, so the bad guy in this movie is called Bismarck. In most countries in Latin America in the 1930s and in the 1940s, social insurance was conceptualized as something very much associated with the status of workers in the labor market. And this is the key issue that I wanna discuss that when the labor market is divided between a formal and informal sector, social insurance is very difficult. The scope and benefits that different workers get or as I'll come back in a minute, the same workers get depend on the nature of social insurance. And this dependency of social insurance on people's status in the labor market has implications for who's covered and who's not covered. How fair is the overall system? What risks are people covered from? How sustainable this is from a fiscal point of view? And I will speak a little bit, Kunal mentioned some of my recent work about how this impact the behavior of firms and workers and impacts productivity and growth. There's a lot of variation across countries, but roughly, roughly, if you read the constitution of Peru, Colombia, Mexico, Argentina, Honduras, not sure you wanna do that, but if you ever did that, what you'll find is that constitutions and labor laws in these countries make a distinction between salaried workers and non-salaried workers. This is a really very important fundamental distinction. A salaried worker is somebody, the name itself says, who receives a salary, a monthly payment or weekly payment or bi-weekly payment, a flow payment per unit of time, has a boss and has to do the task that the boss gives them. And non-salaried workers, anybody else. It can be somebody that's self-employed, but it can also be somebody who works in a firm but it's paid in proportion to the output of the firm or it's paid in proportion to the sales, to share risks, to elicit effort. There are many, many contracts like that. Think of the typical firm in Latin America or in Mexico, papa, mama, the cousin, the, you know, and the, whatever, they're not salaried workers in there, they're all working and they're sharing the profits of the small little family firm. All these workers are non-salaried. So this distinction between salaried and non-salaried worker is fundamental and it's embedded in the constitutional and legal structures of most Latin American countries. The bad guy here is Bismarck because when social insurance was conceptualized in Germany at the end of the 19th century, the underlying tacit assumption was that eventually everybody was gonna end up being a salaried worker. So salaried workers receive something called contributory social insurance, that's what the CSI stands for up there, and non-salaried workers until recently receive no benefits, but I will come back to this in a minute, now they receive something called non-contributive social insurance. The traditional social insurance for salaried workers is benefits are paid from their finance, from a tax on wages, wages can be observed, measured easily, and they're called social contributions and that's why you call this contributory social insurance because it's contributed from wages. It's really not the right name, it'd be much better to call it contributory social insurance based on a wage tax. It's a long name, but it's more precise of exactly what is going on, it's a tax on wages. And this is sometimes usually bundles health insurance, disability insurance, life insurance, but in Colombia it also adds labor training programs, in Argentina it also adds family allowances, in Mexico it adds housing and daycare, the bundle changes from country to country, and is usually associated with dismissal regulations because salaried workers cannot be easily fired by the firms. Non-salaried workers receive a separate bundle called non-contributory social insurance, and these are targeted to anybody who's not covered by contributory social insurance. So with that, because the constitution and the laws to begin with split the labor force into two separate groups, the words formal and informal come into use as a derivation from that legal institutional structure, and I will now, and this is based on some work that Ravi Kanwar has done, I will now define formal workers as workers that are receiving contributory social insurance benefits. And informal workers are gonna be receiving benefits from non-contributory social insurance programs. If the law was complied with in countries, every salaried worker would be formal. But there's a lot of cheating going on in Mexico and Colombia and Peru and all of Latin America. The law is violated substantially. So there are a lot of salaried workers that are hired by firms, and the firms cheat, they don't enroll their workers with contributory social insurance programs, and therefore they're salaried but informal, and they're covered then by non-contributory programs which also cover self-employed workers and other workers that legally did not have to be enrolled in contributory programs. So very importantly, informality is not equal to illegality. A lot of informality is legal because the self-employed are not required to contribute and because made workers in family firms are not required to contribute, and some informality is illegal because some firms are cheating and they're violating the law. So what is contributory social insurance? Just to review everybody will know it. A worker is hired by a firm and they pay them the wage W star. The contribution is T and the upper script CSI stands for contributory social insurance. I'm not gonna express it as a proportion of the wage but usually it's 30%, 35%, 40%, whatever, 25% of the wage. So if a firm hires a worker, a salaried worker legally, the firm has to pay W star plus T and then the worker gets W star in nice little pieces of paper like this. Gosh, it takes home, nice little piece of paper and then T, and he's told, look, T is gonna provide you with health insurance and 25 years from now is gonna provide you with a pension and is gonna provide you with a care and that's what T is for. And so the benefits of T can be private or public. It doesn't really matter for the arguments that I wanna make here. And in principle, T is paid by the firm. And people think that this is a mechanism by which the firm redistributes incomes to the worker but we all know that some of the incidents of that is gonna be shifted back to the worker in the form of a lower wage. So part of T is paid by the worker, part of T is paid by the firm. Depending on the econometric studies that you look at, about two thirds of T ends up being paid by the worker, about a third of T is paid by the firm. So that's contributory social insurance. I wanna discuss three limitations of contributory social insurance. First, by construction, it could not cover the whole population. That's the way the laws were written. It was only for salary workers. But because there's cheating, it covers a very small share of the population. In fact, in Latin America, less than half of the population is covered by contributory social insurance. This is extremely sad. This is 70 years after Bismarck. 60, 70 years after these laws were put into these countries. And look at some countries like Colombia or Mexico. These are large countries with high income per capita. They have informality rates of 60, 70%, Bolivia, 80%. Very few countries have low informality rates of Chile or Uruguay, but the most countries are. So first point, even if there was full compliance, this is never going to cover the whole population. It's an exclusive system, it's immense. Second problem is that firms and workers pay T for social insurance benefits, right? But the workers don't really think that they're getting T in return. Let me give you an example. So the worker says, look, you've been enrolled in health insurance. And the worker says, oh, that's wonderful. I'm covered by health insurance, terrific. He says, my wife is pregnant, where could she give birth? Well, the facilities are not really ready now. Maybe you can take a bus and in 300 kilometers from here, there's a hospital where your wife can be looked at. So the worker doesn't really think that his health insurance is so great if actually he's not receiving services in respect. And then he says, look, you know, I'm gonna get Daker, right, in exchange for T. He says, yeah, yeah, you can get Daker. Here is a waiting list, and we have a space for you that is gonna be open in two and a half years from today. Look, by then my child's gonna be already in school. You know, I need the Daker today. So there are many problems with the provision of services, the quality of services. And so therefore workers think that they're gonna get beta T, beta slash one. But if the firm pays T and the worker gets beta T, beta less than one, therefore something is being lost. And there's a tax implicit in the functioning of contributor social insurance. This tax can be quite high. And in some work that I've done with some colleagues, actually some colleagues from the IDB, this tax can be on the order of 14%. I'm not talking here about a payroll tax. And I'm talking here about the fact that workers and firms pay for contributor social insurance, but they're not getting in return what you think they're getting, okay? Think of it, you pay the price of a Rolls-Royce and you get in return a Ford. That's contributor social insurance, right? So you don't like paying the Rolls-Royce price to get in return a Ford. The second is that, so benefits are undervalued and this is a nice, really interesting result from Columbia. In Columbia, the contributions for health insurance were about 12% of the wage. There was a reform in 2012 that lowered the contributions to 4% of the wage. So, do the invert exercise with me? If indeed the contributions were fully valued, as the contributions fell, the wage must have gone up in exactly the same proportion. Nothing should have happened to formal employment. But in fact, in Columbia, formal employment grew by about 5% of points from the point in which the reform was made, which basically says that when the contributions came down, it was basically a mechanism by which the tax on wages came down and as a result, firms increased formal employment. So this is a very nice proof and there's some more detail papers, I'm not going into the detail that shows that in fact, contributor social insurance was taxing formal employment. The third problem with contributor social insurance has to do with the fact that we tend to speak in Latin America and in many papers in social protection, we tend to speak about formal workers and informal workers, right? Kunal is formal and Santiago is informal. As if Kunal's formal status was a permanent feature of Kunal and Santiago's informal status was a permanent feature of Santiago. But in fact, we now have very rich data from the functioning of the labor market in Latin America that says, uh-uh, Kunal is sometimes formally employed and then Kunal himself is sometimes informally employed. People transit across jobs and as they transit from one job to another job, they transit from formal status to informal status. So these are data from Brazil, Colombia, Venezuela, Argentina, Mexico, Ecuador, Paraguay and Peru which show that in any one year, people change from formal to informal status or from informal to informal status and if you see the shares of people, they're not small. Every year between 15 and 20% of the population shifts from one to the other. So even though we speak in the literature on social protection about formal workers and informal workers, that's a misnomer. We should really be speaking about when workers are formally employed and when workers are informally employed because it really matters because only when they're formally employed are they covered by health insurance, unemployment insurance, are they're saving for the retirement pension. But if you're moving between the formal and the informal sector, sometimes you're saving for your pension and sometimes you're not. Sometimes you're covered by an employment insurance and sometimes you're not. Sometimes by health insurance and sometimes you're not. So if I go to Ugo and I say Ugo, I've got a great deal for you. I'm gonna sell you an insurance policy for your house that is gonna protect your house against fire and earthquakes in spring and fall. However, in the summer and the winter, your house is not gonna be covered. So Ugo's not gonna be very happy with an insurance policy that covers you erratically throughout the year. And this is what's happening with contributory social insurance and is one of the reasons why BETA is less than one because people are not getting the full insurance coverage that you get. So the efficiency of social insurance is much affected and I wanna show you some data from Mexico that is extremely sad. In Mexico we did a pension reform in 1996. We went into a system of individual accounts. So now I have data, this is amazing, this is fantastic, I have data for 36 million workers which we have followed over 22 years. When they were formal, they were not informal, when they were formal, they were informal. On average, Mexican workers over the last 22 years have had a formal job only 43% of the time. So that's terrible because actually most workers are actually not gonna get a pension. The law says that to qualify for a pension you've gotta contribute 25 years. But if I'm formal, less than 50% of the time, I've gotta work like 55 years to make 25 years of contribution, you're with me. So these are the densities of contribution. About 39% of the workers have been formal between zero and 20% of the time. About another 16% of the workers have been formal between 20 and 40% of the time. Only 23% of the workers have been formal more than 80% of the time. And I participated in Mexico's pension reform in 1996 and we did not have knowledge of this data and we did not understand the dynamics of the labor market. But what is true is the following. Under the current Mexican pension system, two out of every three workers are not going to qualify for a pension, even though they're contributing for a pension. And one out of every two workers are not gonna qualify for health benefits when they retire, even though today they're contributing to the health benefits of the contributory system. So the contributory system in Latin America is not working very well. This data I could show you for Colombia, I could show you for Peru, from any other countries, it's a system that covers less than half of the population and it's a system that is not delivering right pensions and is not delivering right healthcare. I saw some friends here from the World Health Organization and we were chatting with them yesterday. There's very interesting data of what happens to the health of people that sometimes are being looked at in the health insurance of the contributory system and sometimes in the health insurance of the non-contributory systems. And we have data for diabetes now in which the follow-up of patients as they shift from one system to the other system collapses because they're two separate health systems to actually look after what is essentially the same population and the efficacy of treatments against diabetes is actually falling. The clinical data shows that people are not getting the right treatment. So a non-contributory program saved the day. After the debt crisis of the 1980s, beginning the 1990s, as Latin America was becoming a much more democratic continent with many changes in government, many governments realized, look, half of the population, half of the workers don't have access to any health insurance. So we've got to do something and the thinking was, okay, transitorily while the contributory system expands and covers everybody, we're gonna introduce some non-contributory programs that are gonna provide health and pension and other benefits to workers as they get along. There are many variants of these programs but most countries in Latin America today by now have some sort of health coverage for informal workers through non-contributory programs have some sort of a pension and depending on the country that you look at, they have other benefits like daycare, family allowances, labor training programs, specifically focused on informal workers. If you're the pension minister of Peru or Colombia or the health minister of Mexico or Colombia, Peru or Paraguay, you like non-contributory programs. From your point of view, population is getting some benefits that otherwise they would not get. Some of social point of view said, look, it might not be as good as contributory programs but it's better than nothing. And remember, nobody's paying for this because the money comes from general revenues. Firms can hire workers and workers will get benefits even if the firm is illegally hiring the worker because these benefits are provided to anybody who doesn't access the contributory benefits. That's the way the system works. So, what happens when you have these non-contributory programs? We, in Mexico, started a program in 2003 to deliver health benefits to workers excluded from contributory programs. This program is called Segur Popular. There's been quite a bit of econometric work done on these programs. So in the blue line on the left side, you see the coverage of the population in the non-contributory health program. The red line is the coverage of the population of the contributory program, the IMPS, the Mexican Social Security Institute. You can see the stagnation in the coverage of the contributory program. You can see the explosive growth in the coverage of the non-contributory health program. So now the next question is, what happens in the labor market when you tell people, look, if you are formal, you've got to pay for your health insurance and for your pension. Never mind that you're not going to get a pension. You've got to pay for your health insurance for your pension. However, however, if you're informal, you're going to get health insurance for free. So on the right panel, what I show here is a difference in difference estimation done by some researchers from the IDB. Of what happens in different communities, the program was rolled out earlier in some communities and later in some communities. The blue communities it was implemented before and the red communities it was implemented later. And on the vertical axis is the rate of growth of employment in the formal sector. And what you clearly see is that from the date in which the program was beginning to be implemented, employment in the formal sector began to go down. This is not surprising. If you have a labor market in which there's a lot of fluidity between the formal and informal sectors, and I show you data that people transit back and forth between the formal and informal sector. And if you raise the benefits of informal employment relative to the benefits of formal employment, if there's a tax here and there's a subsidy here and you raise a subsidy, what people are going to do is they're going to move. And what this shows is that informal employment was actually increased. The numbers are not small between 80 and 20% as a result of this particular program. There's actually an interesting case. I put this slide because it's relevant for Mexico in the following sense. When this program was launched, the mayor of Mexico City was the current president of Mexico. And at that time, the mayor and the president were from different political parties and the mayor said, uh-uh, that program is not going to be done in Mexico City. So he decided to do his own program. And he provided econometricians with terrific empirical evidence because he started a program to deliver health benefits for informal workers in Mexico City. But it was not done in other bigger cities like Monterrey and Guadalajara, which are the two largest other cities aside from Mexico City. So an econometrician goes like bing, bing, bing. I have my control group. I have my treatment group. And this is a very nice example of what happened to the rates of informal employment by women in Mexico City where this non-contrary program was put in compared to Guadalajara and Monterrey where this program was not put in. So all the controls and all the nice stuff and all that stuff is in there. And again, what we have here is evidence of what is happening with informal employment. So this is an interesting case from Argentina. In Argentina, contributory social insurance has family allowances. And during the government of President Kishner before President Macri, it was decided that family allowances were also going to be extended to informal workers. And so this is a paper by two Argentinian economists. This is a very nice paper in which what they show is what happened on the vertical axis you have is the share of informal workers that become formal. And the ones that have kids, since now they also get family allowances even if they're informal, have lower incentives to become formal compared to the ones that have no kids. For them there are no additional benefits. And so what this basically says is that extending family allowances to informal workers in Argentina actually increased also informal employment. Exactly the same issue conceptually, exactly the same issue as the health. But this is family allowances. This is for pensions. I wanted to show an example from health an example from family allowances. This is from pensions. So also in the Kushner government they decided to extend pension benefits to women that had not contributed to pension benefits that were close to retirement age. And what this shows is the share of women be close to retirement age 60 to 64 that were getting pensions and then in red the share of people that are actually not working. And what the two graphs show it's a different diff. So I'm not gonna go through the technical details but what the graph is basically showing is that women started to retire earlier because they were now getting pension benefits that they were not contributing before compared to women that were not getting these benefits. One last example from Uruguay. This is an example of exactly the same phenomenon. Family allowances. On the vertical axis you have people registered with formal employment, the registered employment rate. And people who qualified for the family allowances people who did qualify. The people who did qualify have much lower shares of informal employment compared to people who qualified. So before I go into the slide what is going on from the economics point of view is actually some very simple. A labor market is integrated people can go back and forth between the formal and informal sector. In one sector there's contributory benefits but there's really an implicit tax because the taxation rate is higher than what the benefits are delivered in return for that. In the other part there's benefits that are free. The more you increase these benefits which from a social point of view is quite desirable from an economic point of view what you're doing is you're making informal employment relatively more attractive to formal employment. There's a large literature that has emerged in Latin America over the last 15 years looking at these programs in Peru, in Colombia and Uruguay and Paraguay, I can't show all the papers. But basically these are all kind of treatment controlled, diff in diff approaches in which they're trying to identify fairly carefully the impact of an individual policy. An important methodological observation here is that really from the policy point of view what we're interested is what is the impact of the whole construction? What is the impact of the contributory programs and the non-contributory programs all at the same time? Few papers can do this because there's some methodological problem in trying to identify many things that are happening at the same time. And so we would really be interested in the change in formal employment as a result of all the contributory programs and all the non-contributory programs. I was planning to use a pointer but I was told I cannot use a pointer because the screen absorbs light instead of showing light. So I can't do this. But on the left side there, what you really wanted to know is what is the impact of the whole social insurance architecture, contributory non-contributory on formal employment and most of the papers really look at the individual effects of a single one. With a couple of colleagues in Mexico about six years ago I wrote a paper in which we try to use simulation techniques rather than different approaches to try to measure the impact of the whole architecture and you get large numbers in terms of the sum of the tax on formal employment with the subsidy to informal employment changes formal employment by orders of magnitude that are really quite relevant 25 to 30%. Let me talk a little bit about, Kunal mentioned a little bit this one when he was making the introduction but let me talk a little bit. What does this mean when social insurance policy is having this very contradictory effects? On the one hand, yes, you're providing health benefits, pension benefits, family allowances, daycare, what not, too many households that don't need it but at the same time you're taxing the formal sector and you're subsidizing the informal sector. So firms react, firms don't sit by. I'm a firm, I say, look, I'm going to hire Kunal. So I say, look Kunal, there are two options. I can hire you formally and between you and I we've got to absorb T, 30%, or how about if we make an arrangement? We save T between you and I, maybe you get a little bit of the T, I get a little bit of the T and in any event, Kunal, don't worry, there are all these non-contributive programs out there, you can get your pension benefit and your health benefit and what not. So firms are going to cheat more and workers are also going to be entitled to cheat because they're taxed on one side and they're subsidized on the other side so there's going to be more cheating and this is going to affect what firms do and they're going to affect what not do. So very quickly, a little bit of structure but what is basically happening in the labor market is if you hire a worker legally salaried, you pay the wage and the contribution, the worker gets a little bit less than the contribution, remember Betas less than one, so there's an implicit tax of formal employment. If you're a non-salaried worker, you get the wage in the informal sector, you get benefits from the non-contributory programs and therefore you're clearly subsidized and in the middle, if you cheat a little bit, depending on whether you are going to be caught by the authorities cheating or not, you will cheat. Of course if you're a firm with a thousand workers, it's very unlikely that you're going to cheat. But if you're a firm with two or three workers, why not? The chances that they're going to cheat, cut you're gonna, so lambda is a probability that you're going to be caught. Think of lambda as an increasing function of firm size and what you're going to get is that the labor costs in the economy, and this is Mexico, are going to look like if you hire workers legally, you're in the top black line, if you hire workers non-salaried, you're in the lower black line, and if you cheat, you're in the increasing line with the increasing function, with the increasing function of the probability of being caught, which is increasing in the size of the firm. In my own numbers for Mexico, any firm with less than seven workers is actually subsidized and any firm with more than seven workers is actually taxed. So think you're a Mexican entrepreneur and you're looking at the diagram. Now they don't quite look at this diagram, but they understand it even better than this diagram. Mexican entrepreneur is going to look at this diagram and he's going to say, what should I do? Well, if I stay small, I hire non-salaried workers, or if I stay small, I hire salaried workers, but if I cheat, I'm subsidized, otherwise I'm taxed. So this is some data from the census in Mexico, the last census, which tells you a little bit about the structure, the number of firms in Mexico and the type of firms that there are. 73% of all firms in Mexico are informal and legal. They're hiring non-salaried workers. They're mostly family firms. Another 17% of the firms are cheating. Only 10% of the firms are actually hiring salaried workers and complying with the law. 91% of the firms have one to five workers. Amazing, isn't it? It's really pretty, I don't know, it's fantastic. More than half of the workers are informal and a good bit to the capital stock is actually in the informal sector because investing there is quite profitable even though you do it in the very small firms. And this is from my latest book that Kunal was mentioning to try to link the social protection story with the productivity story. What you show here is the productivity of informal firms, TFP is total factor productivity. The productivity of informal firms relative to formal firms is much lower, even controlling for size. So the more you shift resources into the informal sector, the more you're making the economy less productive because you're distorting the size and the type distribution of firms. So I'm gonna start summing up the story to move on. So where did we start? The bad guy was Bismarck. He segmented the laws, he segmented the constitutions and he said, look, social insurance is only for salaried workers. So that's how contributed social insurance was born. It's exclusion by design, but it doesn't work very well. They charge you for a Rolls Royce and they deliver a Ford in return. And therefore people try to cheat, evade. People are not covered. Non-contrary programs come to the rescue. But that's good from a social point of view. It's not so hot from an economic point of view. What you end up doing is you end up taxing the formal sector, you end up subsidizing the informal sector, this lowers productivity and this sort of generates a vicious circle and puts Latin American policy makers in this dilemma. In a dilemma in which on the one hand the finance minister and the economy minister says, look, we've got to stop subsidizing the informal sector. We've got to stop, we've got to really worry about productivity, we've got to raise revenues and blah, blah, blah. And then the pension minister and the health minister and the social development minister are saying, look, we've got to increase social cohesion. We've got to increase redistribution. We've got to do all this. And with any combination of programs and we'll have all these programs. And this is a little bit the trade-off that the region is facing. Of course, the trade-off differs from country to country. The margins are different from country to country. The functioning is different. But the basic story that I'm telling sort of follows country by country. So in sum, this architecture is not the right architecture from the point of view of social cohesion. It's not a very effective system from the health point of view, from the pension's point of view. It's actually deeply worrisome. Think of Ugo, you know, suppose Ugo's Mexican, okay? So Ugo goes and he gets his bachelor's degree. The same person with the same human capital working the same number of hours with the same effort. Sometimes Ugo gets good health coverage and sometimes Ugo doesn't get good health coverage. And sometimes Ugo gets access to a daycare service and sometimes he doesn't. And sometimes maybe to a family allowance and maybe he doesn't. Same person, same human capital, same effort. Ugo doesn't think very highly of the Latin American state. And not too many people think very highly of a social protection system that is structured the way this is structured. So I've been arguing for 10 years. My batting average so far is zero. I've been arguing for 10 years that we've got to escape this trade-off. That we've got to escape this trade-off and that we have to move to a system of universal social insurance. That we have to think about some elements of social insurance, at least health and some dimensions of daycare and pensions. We can discuss the details, but at least health and some dimensions of pensions and daycare. As an entitlement in the same way that we think about basic education. That we have to rethink the architecture of social insurance. And that we have to make a case that all citizens should be treated the same in a system that would be substantially much more redistributive. My guiding principle should be risks that are independent of the nature of your job should be covered from the same source of revenue. Getting sick doesn't depend on whether I get a salary job or not salary job. So it should be covered from general revenues and we should move to a system of universal health insurance covered from general revenues. Longevity, some basic protection against longevity should also be done in the same way. There's some risk however that are specific to salary labor. The boss will fire you. Unemployment insurance therefore should be funded from attacks on wages. And some of this principle is a principle that I think needs to be adapted. Of course this is to be adapted to Colombia's different Peru, Peru's different from Mexico, Mexico's different from Paraguay. You have to think about the fiscal dimension. You have to think about all the details. But the basic guidepost of where you want to go is there. Let me try to tie up with some discussion of social assistance and then I'll close talking about social protection in general. Kunal made some introduction about targeted programs, targeted poverty programs in Latin America of which he mentioned Progresa that I was involved during the time of President Sidillo. Will these poverty programs break the intergenerational transmission of poverty? And in my view, there are two requirements that need to be fulfilled for this to occur. First, poor people have to have more human capital. Better nutrition, better health, more education. But also they have to have better income opportunities. In my reading, I'd be wrong, in my reading of the social protection literature, there's somewhat of a conflation or a confusion within the objectives of social insurance and the objectives of CCTs, everything under the umbrella of social protection. CCTs are not job creating programs. CCTs are not there to provide social insurance. CCTs are there to invest in the human capital of the poor. They deliver nutrition, they deliver education, and they stimulate the demand for health services. There's interventions on the demand side. So to think about this problem, the previous discussion was this discussion about the columns, was a discussion about the fact that as a result of the segmentation into a formal and informal sector, social insurance had to deal with the fact that there were formal workers and informal workers. Social assistance has to do with the rows. With the fact that there's some non-poor people and some poor people. And what you want to think about is redistribution is from non-poor to poor, not from formal to informal, yeah? That's the big mistake in that. You want to redistribute from the non-poor to the poor. That's separate from the formal to informal. And I think this matrix is important in understanding because what this matrix is doing, what is Mexico doing? Mexico is trying to use progresa to go from the upper row to the lower row, to redistribute to the poor through social assistance program. But what is Mexico's social insurance policy doing? What Mexico's social insurance policy is doing is saying, A, stay in the informal column because you're subsidized if you're staying in formal column and if you move to the formal column, you're going to be taxed. So Mexico has a major problem and Colombia has a similar problem and Peru has a similar problem and Mutatis, Mutandis countries have problems that look like this. There's an incentive compatibility between the way their poverty programs are structured and their social insurance programs are structured. Their poverty programs are investing, their CCTs are subsidizing the demand for education, the demand for health, and they're investing in nutrition. And as Kunal mentioned in the introduction, there are quite a few impact evaluations that I say, yes, the human capital of the poor is actually increasing as a result of this intervention. They're getting more years of schooling, they have better health outcomes and they have better nutrition outcomes. That's between zero and 18 of age. Then they enter the labor market and in the labor market, they get a completely different story. The labor market, the structuring of social insurance in the labor market is saying, look, it behooves you to be informal because if you're formal, you're going to be taxed. And what you're going to get are labor outcomes that are going to not be. So this is data from Mexico that makes me very sad because what it basically shows is a major policy failure over the last 15 years. What I'm showing here is the black line is the years of schooling of poor workers in Mexico. They have gone, that's on the right-hand axis, they have gone from about seven years of schooling to now nine years of schooling. In 15 years, with the help of Progresa, there's been a notable increase in the schooling of poor workers in Mexico. Two years over seven years is actually not a small percentage. Two more years of education, that's the black line. The dotted line is the rate of informal employment of the same workers. What you would have expected is that the dotted line be negatively sloped. More human capital, better nutrition, better health, not better jobs because there's a major incompatibility between the way social assistance and social insurance is structured in the region. So conceptually, this is what I think is going on and what we need to fix. Imagine that you start at point A in the lower right-hand quadrant. You're poor and informal and you're in point A. Ideally what you want is for people to move upwards in the income scale from poor to non-poor. And ideally what you like for people is to be more productive so that they have higher income. So to move from the informal sector to the formal sector because we know that productivity on average in the formal sector is higher. So you would like them to move from point A to point B. And the additional income, delta earned income, the additional income would be income that they earn with their own efforts, right? So moving from A to B, bingo, success. We broke the intergenerational transmission of poverty. But if you move from A to C, you might get an additional transfer that maybe raises you above the poverty line, but it's not making you more productive because you're still informally employed. And what has happened in Latin America is that social insurance policy is pushing people this way. Poverty policy wants to push people towards A, but they're actually are ending up in C. Well, a lot of people with more human capital, but not more productivity in stagnant economies. So let me conclude. I'm trying to make the case that the current combination of contributory programs and non-contributory programs is both bad social policy and bad economic policy. It is not an individual program by itself. It's the combination of all the programs that it's not working. Insurance is not efficacy. Hugo doesn't want insurance for his house only in spring and the fall, but not in the summer and the winter. And Santiago wants to be treated for his diabetes all the time, not only when he has a formal job. So it's not so good social policy and it's not good social policy. I've argued that there's strong equity because we want to treat Hugo the same with his human capital and his effort and his contribution. On equity reasons, we should move to universality, but also on productivity reasons, we should move to the universal systems. And this is a tall order because it involves issues of tackling fiscal dimensions. If I don't finance health insurance from wage-based contributions, where am I gonna find them from? And now we're talking about the serious business. About taxation, about the need to underline the real, the deeper structure and generating revenues for paying for these benefits. And as you tackle this, you really get into the really, really difficult issue. So that's for social insurance. For social assistance, I think that income transfers for the poor in the social protection discussion should be really focused only in investing in the human capital of the poor. But the poor should not be discriminated from the point of view of social insurance in terms of what access to which programs they have. So if you want the poor to escape poverty with their own efforts, they need to be more productive. And that requires a well-functioning labor market. And therefore, a well-structured social insurance system, not a poverty program. A well-structured social insurance system is part of your poverty policy. We cannot continue thinking that we're gonna eliminate poverty in Latin America by this particular program or that particular program. We really need to move into think about systemically on what is happening in the labor market. Non-contributory programs in the end, to the poor, they give with one hand and then they block them from progressing with the other hand because the labor market is increasingly dysfunctional. So in social protection, I think now I'm moving upwards now from social insurance, social assistance, social protection. We have to really make a distinction between these two types of programs. There's sometimes a discussion in social protection about universalism or targeting is the way to go. I think this is a false dilemma. I think we should think about universal benefits when we think about social insurance. And then we can target additional benefits based on income levels on the poor so it's not a real dilemma between universalism and targeting. And we have to think much more carefully about the incentives, about the social programs that are implicit. Who's paying, who's benefiting, what are things doing? This is my last slide. The debate that I'm pushing forth is not about this program, this pension program or this family allowance program or this daycare program or this health program. That's not what the issue is. The issue is about the architecture about all the programs. And this brings, and this is a nice discussion in the graduate school here in Geneva, a very important methodological challenge. The Nobel Prize was just given two weeks ago, three weeks ago, to three extremely distinguished people of the huge advances in terms of interpolation of individual programs. What I'm trying to argue now is that we need to move beyond the impact evaluation of individual programs and we need to think about systemically. And so being in Switzerland and being in Geneva, I thought that the analogy of a watch would work. Think of a watchmaker and think of the individual pieces of the watch as individual social programs. This health program, this daycare program, this family allowance program, this non-contracted pension program, right? We have 20 years of research in which people say, ah, look at my program, you know, I did this different diff and I have these effects and you know they're right. And it's a beautiful program and it's very well evaluated. How many watchmakers in Switzerland would change the piece of a watch and put another piece of the watch, even if it was very pretty, if it didn't understand how the whole watch works? So we need to think about the general equilibrium of the social protection and how it interacts with firms and workers and the whole system interacts. We really need to move in that direction. And in my view, this is urgent. This quote is a beautiful quote. It is mostly up here. I personally think that the political obstacles to moving to universalism are sometimes over dimensioned. The biggest obstacle is up here. And in Latin America, things are always the opposite. It is not really, as Cain said, about politicians being prisoners of some old-styled economist. In Latin America, the problem has been exactly the opposite. The problem has been that we economists have been the prisoner of a defund politician. Thank you for listening to me.