During the so-called "lost decade"of the 1980s the region lost so much ground that in 1990 poverty levels were even higher than those at the start of the 1970s. Indicators have improved with a resumption of economic growth in the 1990s, but not nearly enough. In 1980, 35% of all households were poor. By 1990, that figure had risen to 41% and was still 39% in 1994.

The effort to account for these trends has sparked a great deal of controversy as to how macroeconomic performance, structural reform and globalization influence social indicators. A number of studies have confirmed that poverty tends to decline in the presence of economic growth. Others point to a growing amount of evidence that economic liberalization and globalization have lead to a deterioration in income distribution. In a number of recent studies ECLAC has attributed this deterioration in income distribution to the widening wage gap between highly-skilled and unskilled workers in a context of sluggish rates of job creation for skilled occupations. According to ILO estimates, eight out of every ten new jobs in the 1990s are in poor-quality occupations within the informal sector.

In Latin America, one possible explanation has to do with the fact that the trade liberalization process was launched on the heels of a decade-long downturn in social expenditure, and the shift in labour demand towards highly-skilled manpower consequently ran up against an inelastic supply of such workers. Furthermore, no serious effort was made to match supply and demand for different skill levels. Another hypothesis focuses on the argument that the tendency towards currency overvaluations and steps taken to open up the capital account, among other reform measures, created patterns of growth in which exports rose more slowly than imports and the production of tradeable goods was less buoyant that non-tradeable goods and services, thereby skewing labour demands. Macroeconomic policy management has also gone through abrupt stop-and-go cycles which, in combination with fluctuations in capital flows, has caused growth rates to remain highly volatile, thereby interfering with the creation of more stable types of jobs.

One of the major challenges facing Latin America today is to demonstrate that the new development model is compatible with a gradual correction of the region's social inequity. Failure to attain this objective could undermine political foundations of the reform process, largely because the restoration of macroeconomic stability has been viewed favorably by the general public. Another equally serious hazard is that such a failure might generate social tensions which could create problems of governance and erode the political consensus that has made it possible for democracy to thrive in the region, which is unquestionably one of the major achievements witnessed in recent years. 

Many experts conclude that economic liberalization policies need to be coupled with more ambitious, efficient and effective social policies, known as the "second generation" reforms. Some services have already been been opened up to the private sector, while services that remain the responsibility of the State are being decentralized, new results-oriented public management schemes are being devised, public-sector service providers are being given effective autonomy, and mechanisms are being established to give the general public a role in overseeing government management.

These reforms offer promising opportunities but they are not a panacea: they need to be pragmatic and based on a gradual, learning-by-doing approach. The participation of the private sector cannot always serve as a substitute for government-provided services, so it is advisable to design mixed systems in which public and private agents can compete with one another. Where competition is not a viable option efforts must be made to upgrade public services through decentralization, implementing results-based public management systems, granting autonomy to public service providers and allowing the citizenry to play a role in overseeing these activities. These measures are essential, and perhaps the most basic, elements of any social service reform initiative.