10 This “truncated welfare state” ‐ where income redistribution took place primarily among the better‐ off, to the exclusion of those most in need ‐ co‐existed with persistent poverty and inequality in Latin America.<sup>8</sup> Table 1 presents the poverty headcount and the Gini coefficient for income inequality for 23 countries in Latin America. The international $2.50‐a‐day poverty line (converted at 2005 purchasing power parity exchange rates) is used to identify the poor, and the data come from the Socio‐Economic Database for Latin America (SEDLAC) and the World Bank’s POVCALNET database.<sup>9</sup> There is considerable heterogeneity among countries, both in current poverty levels (which range from 3.3% in Uruguay to 79% in Haiti) and in past trajectories: whereas poverty fell from 24% to 9% in Chile between 1981 and 2000, it rose from 2% to 14% in (almost exactly) the same period in neighboring Argentina. There are also large differences in the level and changes in inequality (see De Ferranti et al, 2004 and Lopez‐Calva and Lustig, forthcoming). But the fact is that all countries in the region remain substantially unequal, and most are marked by unacceptable levels of deprivation. In the early 2000s, absolute poverty at the $2.50‐a‐day poverty line was larger than a quarter of the population in 15 of the 23 LAC countries listed in Table 1.

In fact, the evidence suggests that, in some countries, the truncated welfare state was more a part of the problem than a part of the solution. Regressive commodity subsidies and the type of _implicit_ redistribution generated by social insurance systems often aggravated instead of alleviating the problem. In large part, the regressivity of many contributory pension systems in Latin America arises from the fact that the value of benefits paid out exceeds the value of contributions received (plus interest). This financing gap is filled from general revenues, or added to the contingent liabilities of the government (which, in the long run, amounts to the same thing). Since the poor do pay taxes (primarily on expenditures) but seldom participate in the contributory social insurance systems, these subsidies end up being regressive. In a recent study of eight LAC countries, for instance, Lindert et al. (2006) found that 58 percent of the general revenue subsidies to social insurance systems accrued to the top quintile of the income distribution, and only two percent to the bottom quintile.

It was against this background that a quiet revolution started taking place in Latin America’s social assistance systems in the early 1990s. A number of countries had re‐established democratic systems in

> 8 See De Ferranti et al. (2004) for an early discussion of the “truncated welfare state”.

> 9 The SEDLAC database is maintained by the _Centro de Estudios Distributivos, Laborales y Sociales_ of the Universidad de La Plata, Argentina, in partnership with the World Bank. POVCALNET is a global poverty and inequality database maintained by the Poverty and Inequality Team in the World Bank’s research department. Appendix Table 1 provides details on specific sources, dates and coverage for the household surveys used to compute the statistics shown in Table 1.