This chapter presents an analysis of the economic and political factors that are hypothesized to have affected the evolution of social spending in Latin America over the last three decades. The chapter draws on the welfare state literature to identify the correlates of social spending and adapts them to the reality of the developing world and to the middle-income countries of Latin America in particular. To this end, possible causal factors are divided into two sets of economic and political hypotheses. The purpose of the chapter is to lay down the theoretical foundations for the empirical analysis presented in Chapter 4. The chapter is organized in two parts. The first part discusses the hypothesized effects of three fundamental groups of economic factors on the fiscal and macroeconomic priority of social spending in Latin America: (1) economic development, (2) fiscal constraints, and (3) trade openness and capital mobility. The second part discusses two sets of political factors: (1) regime type (democracy/nondemocracy) and (2) the partisan orientation of the Executive Branch.

In the discussion of different hypotheses, the chapter develops two theoretical ideas that are key to understanding why welfare state development in Latin America has been affected by radically different dynamics from those that most researchers attributed to Western European countries, where most of the study of the welfare state has so far focused.