The pro-rich behavior of pensions may appear to contradict, at first sight, our argument that in Latin America the rich contribute most to the welfare state without receiving much back, but it does not do so. Pension contributions are in addition to general taxation, and payments at retirement are limited to who contributed, and somewhat proportional to past contributions. Pension systems are therefore to a large extent separated from the rest of the welfare state, and their pro-rich behavior may not reduce the strain caused by the high contributions of the rich to a welfare state that gives them little back.

# **5. LATIN AMERICA AND THE SOCIAL CONTRACT: WHERE IS IT HEADED?**

Despite recent positive trends, social spending remains below the levels of the European welfare states, but is approaching the levels of spending of the United States. In fact, several clues lead to believe that Latin American welfare states are headed towards a minimalist, liberal, US-style welfare state rather than towards a more comprehensive, social-democratic, European-style one. First, the structure of social spending and taxation follows closely the one of the United States. Social spending for the poorest income quintile, for instance, averages 9.9 percent of GDP per capita, a figure very similar to the one of the United States (10.4 percent), and much lower than the one of the United Kingdom (20.3 percent). Second, in full similarity with the United States, social spending tends to be flat across income quintiles, while in the United Kingdom – as well as in many European welfare states – social spending is strongly progressive. Finally, on the taxation side, the share of taxation paid by the richest income quintile averages 61 percent, which is close to what the richest quintile contributes in the United States (58 percent), and way more than what the richest quintile contributes in the United Kingdom (43 percent).

The high contributions of the rich to tax revenues are a serious obstacle to the further expansion of the welfare state, and its roots clearly lay in the high levels of income inequality pervading Latin America. Although as a proportion of their income the rich do not necessarily contribute more than in Europe, because of high income inequality their contributions to tax revenues must be much higher than in Europe – and in some countries, higher than in the United States. Latin American countries seem therefore to be trapped in a vicious cycle where high income inequality prevents increasing tax revenues, which in turn prevents the state to act as a provider of equality of opportunities, and which in the long run keeps inequalities high. How to induce the rich to contribute even more remains a serious challenge.

We believe, however, that a way out from this apparent dead end can be found. Improving equality of opportunities through social spending may have a beneficial effect on economic performance (World Bank, 2006b), hence, if the welfare state is gradually expanded, the poor may begin to contribute higher shares to it. Moreover, due to their strong ties with the government, elites in Latin America still benefit from loopholes and tax breaks hurting the efficiency of tax collection, and economic performance as a whole (see, for instance, Guerrero _et al._ , 2006, for the case of Mexico). Reducing elite capture of the state by closing tax loopholes and inefficient tax breaks, while, at the same time, 19