Instituto de Estudios Peruanos

Lima, Peru

11 Noviembre 2008

Resource bonanza and new budget coalitions

in the Andes

(work in progress)

Andrés Mejía Acosta

IDS

a.mejia@ids.ac.uk

Resource Bonanza in the Andes (1998-2007)

0

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2000

3000

4000

5000

6000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

US

$ M

illi

on

s

Resource Revenues in the Andean Region

Peru

Bolivia

Ecuador

Motivation

Who decides over the allocation of non-tax revenues

(extractive industries)?

– Do non-tax revenues weaken accountability?

– strengthen presidential power?

How do windfalls (or shortfalls) affect resource allocation?

– When do they happen?

– Who benefits?

Do different political coalitions affect spending allocations

at the sub national level?

Roadmap

Financing the state

The politics of resource allocation

Resource bonanza in the Andes

Preliminary conclusions/Pending questions

Financing the state

The source of state financing affects its ability to effectively

respond to citizens’ demands

Non tax revenues undermine the state capacit(ies) to provide

good government

– Resource curse (Karl 1997)

– Political accountability (Brautigam et. al 2008)

– Rent seeking (Laserna 2007)

How does the new resource bonanza affect state capacities in

the Andean countries?

– new players at sub national level

– Reproduce or avoid resource curse effects?

¿Who decides on resource allocation?(“budget governance”)

The budget process is an inherently redistributive –and political-

policy arena (Hallerberg et al 2009)

– The nature of the budget process influences the quality of budget

outcomes (Stein et al 2008)

Who are the relevant actors and what do they want?

– Executive, Legislatures, local governments, other actors

What formal and informal capabilities –or constraints- do agents have

to bargain, and allocate government resources?

– Budget rules, fiscal responsibility rules, earmarking, stabilization funds

Which political factors influence resource allocation?

Effective number of political players

– Electoral rules

– Decentralization

Effective checks and balances

– Balance of powers

– Independent judiciary

– Professionalized bureaucracy

Executive discretionality

Executive is the central player in the budget process

– Presidents’ ability to adjust the size, purpose and implementation of

budget allocations

Earmarking (Budget rigidity)

– Rules and procedures that pre determine the size and the purpose of

budget revenues and spending (Alier 2005)

Greater executive discretionality (less earmarking)

– Does it produce more egalitarian distribution?

– Does it reduce flexibility in case of external shocks?

– Does it produce incentives for rent seeking?

– Is it associated with greater fiscal discipline or spending efficiency?

The evidence so far…

Stronger executive power over the budget process…

– Is believed to increase incentives for greater fiscal discipline in

OECD countries (Persson y Tabellini 2000, Hallerberg and

Von Hagen, Wehner 2008)

– It can have the opposite effect in resource rich countries with

weak democratic institutions (Mejía Acosta and De Renzio

2008).

“Fiscal discipline” only captures part of the problem

Budget Rigidity in Latin America

Figure 8: Budget Rigidity in Selected Latin American Countries

(In percent of primary revenue)

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20

30

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50

60

70

80

90

Brazil Ecuador Argentina Chile

Combined rigidity Expenditure rigidity Revenue earmarking

Fuente: Max Alier (2005)

Resource bonanza in the Andes

Dramatic increase in commodity prices produces

unprecedented windfall revenues for governments in

Bolivia, Ecuador and Peru.

Bonanza increases incentives for greater executive

control and discretionality over resource allocation

– New sub national actors mobilize to demand resource

allocation

Executive control and resource allocation depends on

the timing and the nature of “budget coalitions”

between the national and sub national arenas

Budget governance before the bonanza

in Ecuador, Peru and Bolivia (c. 2001)

Executive “predominance” over budget process

Highly rigid (earmarked) budgets: more than

90% in all countries

Redistributive “budget coalitions” formed

between the executive and legislative parties

Budget Rigidities in Ecuador

(Earmarks on tax revenues)

Water providing

companies, 9%

For sport

promotion, 5%

Sectional

Development Fund,

11%

FONSAL, 5%

SOLCA 50%, 3%

SRI, 6%

Other, 17%

University

develpment fund,

32%

Donations, 12%

Resource bonanza

Diminished role for national parties

Triggers new demands from sub national

governments

Timing of reforms was critical for resource

allocation

Evolution of subnational governments’ expenditure

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400.00

500.00

600.00

700.00

800.00

900.00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Dollarization/LRF

No earmarking/ Cuenta Unica

15% sectional govts

Mil

lio

ns o

f U

S$

Years

Budget reforms before resource bonanza in Ecuador

Budget reforms and resource bonanza in Peru

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1000

2000

3000

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5000

6000

7000

8000

9000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Mining Canon

Decentralization

Resource revenues transferred to subnational governments

Resource Revenues by Department in Peru

0

200

400

600

800

1000

1200

1400

1600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Amazonas

Ancash

Apurimac

Arequipa

Ayacucho

Cajamarca

prov_c_del_callao

Cusco

Huancavelica

Huanuco

Ica

Junin

La Libertad

Lambayeque

Lima

Loreto

Madre de Dios

Moquegua

Pasco

Piura

Puno

San Martin

Tacna

Tumbes

Ucayali

Year

Mil

lio

ns o

f N

. S

ole

s

Resource Revenues transferred to subnational governments

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2000

3000

4000

5000

6000

7000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

IDH

Mil

lio

ns

of

Bs

Years

Budget reforms after resource bonanza in Bolivia

Resource Revenues by Department in Bolivia

0200400600800

100012001400160018002000

Mil

lio

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f B

s

Year

Chuquisaca

La Paz

Cochabamba

Oruro

Potosi

Tarija

Santa Cruz

Beni

Pando

Executive discretionality and sub national coalitions

How do central and sub national governments bargain

over allocations?

– Sub national governments would naturally demand greater

resources from center

– Distributional dilemma is enhanced if there are multiple

political actors in sub national territories (Rodden 2006)

Presidents will have greater budget discretionality

where they can rely on partisan harmony between

levels

Budget Coalitions

“Horizontal” coalitions

– Between president and legislature

– Party majority (Venezuela), coalition government (Chile) or

minority (Peru)

“Vertical” coalitions

– If presidents’ party has majority representation in sub national

governments (Venezuela), forms coalition governments

(Brazil) or is the minority (Bolivia)

“New” budget coalitions

Ecuador:– Transfers to regions happen before the bonanza

– Parties do not benefit from new resources

– Greater executive discretionality

Perú:– Decentralization precedes bonanza

– Government does not gain political suport at subnational levels

– De facto budget rigidity

Bolivia:– Strong oposition preexisting bom (Media luna “creciente”)

– Opposition parties not represented in sub national governments

– Extreme rigidity – autonomy demands

Preliminary conclusions/Pending questions

Bonanza increases incentives for greater executive control

and discretionality over resource allocation (Ecuador)

– Not all presidents can do it (Peru, Bolivia)

– Not always a bad thing (Chile)

Timing matters

– Ecuador: Resources transfer preceded boom

– Peru: “decentralization” shock

– Bolivia: IDH adopted during boom

New sub national coalitions (in the absence of political

parties)

– Ecuador: recentralization of political power

– Peru: political deadlock; bridge to sub national governments?

– Bolivia: extreme deadlock/ regional autonomies