public expenditure in latin america: trends and key policy issues benedict clements western...
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Public Expenditure in Latin Public Expenditure in Latin America: Trends and Key Policy America: Trends and Key Policy
IssuesIssues
Benedict ClementsBenedict Clements
Western Hemisphere DepartmentWestern Hemisphere Department
International Monetary Fund*International Monetary Fund*
ECLAC Fiscal Policy SeminarECLAC Fiscal Policy Seminar
Santiago de ChileSantiago de Chile
January 29, 2007January 29, 2007
* The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.
22
OutlineOutline
Latin American Public Spending: A Latin American Public Spending: A Discontinuous March Upward Discontinuous March Upward
Key Expenditure Issues for the RegionKey Expenditure Issues for the Region The Reform Agenda: Making Government The Reform Agenda: Making Government
Expenditure More Efficient and EquitableExpenditure More Efficient and Equitable
33
OutlineOutline
Latin American Public Spending: A Latin American Public Spending: A Discontinuous March Upward Discontinuous March Upward
Key Expenditure Issues for the RegionKey Expenditure Issues for the Region The Reform Agenda: Making Government The Reform Agenda: Making Government
Expenditure More Efficient and Equitable Expenditure More Efficient and Equitable
44
Fiscal balances have improved Fiscal balances have improved in the region in recent yearsin the region in recent years
Latin America: Fiscal Trends(In percent of GDP)
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
20
22
24
26
28
30
Primary Balances (LHS)
Primary Expenditures (RHS)
Revenues (RHS)
Trends in Public Spending
55
Primary spending, however, Primary spending, however, has resumed its upward drifthas resumed its upward drift
Latin America: Primary Public Spending by Region (In percent of GDP)
15
18
21
24
27
30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Latin American Average
South America & Mexico
Central America
Trends in Public Spending
66
Real spending has followed Real spending has followed a procyclical patterna procyclical pattern
Latin America: Real GDP, Revenues, and Primary Spending
(Annual percent change)
-2
0
2
4
6
8
10
12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Real Revenues
Real Primary Expenditures
Real GDP
Trends in Public Spending
77
Current spending has driven Current spending has driven the rise in outlays...the rise in outlays...
Latin America: Public Sector Expenditures(In percent of GDP)
16
17
18
19
20
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
4.5
5.0
5.5
6.0
6.5
Current Primary Expenditures (LHS)
Capital Expenditures (RHS)
Trends in Public Spending
88
……while capital spending has while capital spending has fallen as a share of outlaysfallen as a share of outlays
Latin America: Average Public Sector Capital Spending
(In percent of primary expenditures)
0
5
10
15
20
25
30
35
40
LA Average South America and Mexico Central America
1995-1999
2000-2006
Trends in Public Spending
99
OutlineOutline
Latin American Public Spending: A Latin American Public Spending: A Discontinuous March Upward Discontinuous March Upward
Key Expenditure Issues for the RegionKey Expenditure Issues for the Region Cyclicality of spendingCyclicality of spending Public investmentPublic investment Public employmentPublic employment Social spendingSocial spending
The Reform Agenda: Making Government The Reform Agenda: Making Government Expenditure More Efficient and EquitableExpenditure More Efficient and Equitable
1010
Expenditure is procyclical in all Expenditure is procyclical in all spending categoriesspending categories
Capital outlays Capital outlays are the most are the most procyclicalprocyclical
Compared to Compared to other developing other developing countries, a countries, a higher share of higher share of LA countries LA countries have procyclical have procyclical spendingspending
LA countries also LA countries also have somewhat have somewhat higher higher coefficientscoefficients
Cyclicality of Spending
Total Total
SpendingSpending
Primary Primary SpendingSpending
Current Current SpendingSpending
Wages Wages and and SalariesSalaries
Capital Capital SpendingSpending
Latin Latin AmericaAmerica
1.571.57 1.791.79 1.221.22 1.521.52 5.915.91
Share of Latin Share of Latin American American countries with countries with sig. coeff.sig. coeff.
46.246.2 66.766.7 33.333.3 46.246.2 69.169.1
Share sig. for Share sig. for 35 other dev. 35 other dev. countriescountries
31.331.3 40.040.0 40.040.0 28.128.1 45.245.2
Avg. coeff. for Avg. coeff. for 35 other dev. 35 other dev. countriescountries
1.181.18 1.751.75 1.031.03 1.201.20 1.381.38
Estimates of the Short-Run Response of Spending to Output Shocks
Source: Akitoby and others (2006).
1111
There is no evidence of asymmetryThere is no evidence of asymmetry
Cyclicality of Spending
System GMM System GMM regressionsregressions
Lagged dependent Lagged dependent variablevariable
0.440.44
(3.06)***(3.06)***
0.490.49
(3.50)***(3.50)***
Output gapOutput gap 0.080.08
(2.30)***(2.30)***
Output gap (when Output gap (when positive)positive)
-0.08-0.08
(0.72)(0.72)
Output gap (when Output gap (when negative)negative)
0.170.17
(1.78)*(1.78)*
Log terms of tradeLog terms of trade 0.030.03
(0.01)(0.01)
-0.25-0.25
(0.09)(0.09)
Response of Expenditure to Output GapsDependent Variable: Primary expenditure to GDP
Output gap has a Output gap has a statistically statistically significant impact on significant impact on spendingspending
Positive and Positive and negative output negative output gaps have different gaps have different coefficients, but the coefficients, but the difference is not difference is not statistically statistically significantsignificant
* Significant at 10%; ** significant at 5%; *** significant at 1%.
1212
Public investment is lower Public investment is lower than in other developing regionsthan in other developing regions
Public Investment
1990 – 941990 – 94 1995 – 991995 – 99 2000 – 042000 – 04 2005 – 062005 – 06
Latin AmericaLatin America 4.74.7 4.94.9 4.34.3 4.54.5
AfricaAfrica 7.97.9 7.77.7 7.67.6 8.28.2
AsiaAsia 9.19.1 8.78.7 8.18.1 8.48.4
Central and Eastern Central and Eastern EuropeEurope
3.63.6 3.83.8 3.83.8 3.83.8
Public Investment in Latin America and Other Regions, 1990 – 2006
1313
Not all countries in the region, however, Not all countries in the region, however, suffer infrastructure “lags” suffer infrastructure “lags”
Public Investment
Latin America: Infrastructural Performance ― Deviation of Actual Indices from Values Predicted by PPP-adjusted Per Capita Income
(In percent of the average standard deviation of the residuals)
Panama
El Salvador
Chile
Guatemala
Uruguay
Honduras
Brazil
Colombia
Mexico
Costa Rica
Ecuador
Venezuela
Peru
Nicaragua
Argentina
Bolivia
Paraguay
-200 -150 -100 -50 0 50 100 150 200
Infrastructure
1414
Infrastructure lags may also reflect Infrastructure lags may also reflect inefficiencies in public investmentinefficiencies in public investment
Efficiency can be assessed by evaluating the link Efficiency can be assessed by evaluating the link between public investment and improvements in between public investment and improvements in infrastructureinfrastructure
First step is to evaluate relationship between total First step is to evaluate relationship between total infrastructure spending (public and private) and infrastructure spending (public and private) and improvements in infrastructure using a improvements in infrastructure using a nonparametric techniquenonparametric technique
Public Investment
1515
Infrastructure Infrastructure Production Possibility FrontierProduction Possibility Frontier
Input
(infrastructure spending to GDP)
Ou
tpu
t
(impr
ovem
ents
in
infr
astr
uctu
re
indi
cato
rs)
Y(A)
Y(B)
Public Investment
X(A) X(B)
A
B
C
D
b’
b
Efficient
Less Efficient
The most efficient countries are those on the “production The most efficient countries are those on the “production frontier” (ACD)frontier” (ACD)
1616
Efficiency varies by countryEfficiency varies by countryPublic Investment
Adjusted Public Adjusted Public Efficiency 1/ 2/Efficiency 1/ 2/
Adjusted Adjusted RankRank
Adjusted Level Adjusted Level of Public of Public EfficiencyEfficiency
MexicoMexico 0.8240.824 11 HighHigh
ChileChile 0.7320.732 22 HighHigh
PeruPeru 0.5980.598 33 MediumMedium
ArgentinaArgentina 0.5300.530 44 MediumMedium
BrazilBrazil 0.4320.432 55 MediumMedium
ColombiaColombia 0.2530.253 66 LowLow
BoliviaBolivia 0.0360.036 77 LowLow
Aggregated Public Efficiency Scores
1/ Efficiency in various sectors (transport, electricity, water, telecommunications) aggregated using the share of public investment in each applicable sector.
2/ Adjusted by the effect of private sector spending on the efficiency score in each sector.
1717
Public wage expenditure and employment Public wage expenditure and employment are not high by world standards…are not high by world standards…
Public Sector Employment
Wages, Wages, as a as a percent of percent of
GDPGDP
General government General government employment employment as as percent of total percent of total
employed, 1990semployed, 1990s
Latin AmericaLatin America 7.07.0 20.420.4
AsiaAsia 5.75.7 17.217.2
Eastern Europe and Eastern Europe and Central AsiaCentral Asia
7.97.9 42.342.3
Middle East and North Middle East and North AfricaAfrica
10.610.6 50.350.3
Sub-Saharan AfricaSub-Saharan Africa 9.69.6 28.428.4
OECDOECD 12.112.1 21.021.0
Government Wages and Employment in Latin America and Other Regions, 2004 or latest year
1818
……but the quality of government services but the quality of government services remains lowremains low
Public Sector Employment
20
30
40
50
60
70
80
1996 1998 2000 2002 2003 2004 2005
Latin America
Asia
Eastern Europe & Baltics
Subsaharan Africa
Government Effectiveness(In percentile rank, 1996-2005)
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1990 1992 1994 1996 1998 2000 2002 2004
Latin AmericaAsiaEastern Europe & Baltics Subsaharan Africa
The Quality of the Bureaucracy(ICRG Index, 1990-2005)
1919
Wide variance in wage bills and Wide variance in wage bills and quality of civil servicequality of civil service
No relationship between wage bill and quality of No relationship between wage bill and quality of civil servicecivil service
Institutional weaknesses remain in many Institutional weaknesses remain in many countries (IADB, 2005 and Echerbarría and countries (IADB, 2005 and Echerbarría and Cortázar, 2005):Cortázar, 2005): Patronage in hiring and promotionsPatronage in hiring and promotions Absence of performance evaluationAbsence of performance evaluation Internal inequities in remunerationInternal inequities in remuneration
Public Sector Employment
2020
Social spending absorbs a high share of Social spending absorbs a high share of government outlaysgovernment outlays
Health and education Health and education spending in line with spending in line with other regionsother regions
Social protection Social protection
spending lower than spending lower than OECD but higher OECD but higher than emerging Asiathan emerging Asia
Inefficiencies in Inefficiencies in
spending have spending have retarded gains in retarded gains in social indicators social indicators
Poverty remains high Poverty remains high despite substantial despite substantial social spending social spending
Social Spending
EducationEducation HealthHealth Social Social protectionprotection
Total Total 1/1/
Latin Latin AmericaAmerica
4.24.2 2.62.6 5.45.4 12.712.7
Emerging AsiaEmerging Asia 3.53.5 1.31.3 2.22.2 8.48.4
Eastern Europe Eastern Europe and Central Asiaand Central Asia
4.84.8 4.44.4 12.112.1 22.822.8
Middle East and Middle East and North AfricaNorth Africa
4.24.2 2.02.0 1.81.8 9.19.1
Sub-Saharan Sub-Saharan AfricaAfrica
5.55.5 2.92.9 3.73.7 13.813.8
OECDOECD 6.46.4 6.96.9 17.317.3 32.632.6
General Government Social Spending in Latin America and Other Regions, 2004
1/ Total includes housing and community amenities.
2121
The distributive effects of The distributive effects of social spending variessocial spending varies
Social spending in Latin Social spending in Latin America is regressive – America is regressive – poorest 20% receive poorest 20% receive less than a fifth of the less than a fifth of the benefitsbenefits
Tertiary education and Tertiary education and social security spending social security spending largely benefit high-largely benefit high-income groupsincome groups
Primary education and Primary education and social assistance social assistance spending primarily spending primarily benefit the poorbenefit the poor
Social Spending
Poorest Poorest QuintileQuintile
Richest Richest QuintileQuintile
EducationEducation 20.220.2 20.420.4
PrimaryPrimary 29.029.0 7.97.9
SecondarySecondary 13.213.2 18.318.3
TertiaryTertiary 1.91.9 52.152.1
HealthHealth 20.620.6 52.152.1
Social securitySocial security 5.65.6 17.617.6
Total social spendingTotal social spending 15.015.0 30.430.4
Shares of quintile in Shares of quintile in primary incomeprimary income
3.63.6 56.456.4
Latin America: Distribution of Benefits from Social Spending to the Top and
Bottom Quintiles
Source: ECLAC
2222
The success of targeted social The success of targeted social assistance programsassistance programs
Conditional cash transfer programs have Conditional cash transfer programs have expanded in recent yearsexpanded in recent years
Benefits have been well-targeted to the Benefits have been well-targeted to the poor and have helped reduce poverty poor and have helped reduce poverty ratesrates
However, these programs remain modest However, these programs remain modest in size (1 to 1 ½ % of GDP) and are a in size (1 to 1 ½ % of GDP) and are a small share of social spendingsmall share of social spending
Social Spending
2323
OutlineOutline
Latin American Public Spending: A Latin American Public Spending: A Discontinuous March Upward Discontinuous March Upward
Key Expenditure Issues for the RegionKey Expenditure Issues for the Region The Reform Agenda: Making Government The Reform Agenda: Making Government
Expenditure More Efficient and EquitableExpenditure More Efficient and Equitable
2424
Taming cyclicalityTaming cyclicality
Reducing spending growth during current Reducing spending growth during current cyclical upswing a key challenge cyclical upswing a key challenge
Fiscal rules to reduce spending growth could be Fiscal rules to reduce spending growth could be helpful -- but need to be backed by effective helpful -- but need to be backed by effective enforcementenforcement
Reducing spending volatility will help improve Reducing spending volatility will help improve
the efficiency of spending the efficiency of spending
2525
Making government spending Making government spending more efficientmore efficient
Infrastructure lags reflect inefficiencies in public Infrastructure lags reflect inefficiencies in public investment investment Large efficiency gains possible by adopting best Large efficiency gains possible by adopting best
practices of most efficient countriespractices of most efficient countries
Quality of civil service varies widely Quality of civil service varies widely Reform efforts to tackle institutional weaknessesReform efforts to tackle institutional weaknesses
2626
Improving the equity of spendingImproving the equity of spending
Continued reform of social insurance schemesContinued reform of social insurance schemes
Make education spending more pro-poorMake education spending more pro-poor Increase user fees in tertiary education, combined Increase user fees in tertiary education, combined
with scholarships for low-income householdswith scholarships for low-income households
Improve quality of secondary education to reduce Improve quality of secondary education to reduce repetition rates and broaden access to tertiary levelrepetition rates and broaden access to tertiary level
Expand targeted social assistance programsExpand targeted social assistance programs