a political economy analysis of the budget process in colombia mauricio cárdenas carolina mejía...

A Political Economy Analysis of the Budget Process in

Colombia

Mauricio CárdenasCarolina Mejía

Mauricio Olivera

Fedesarrollo

August 31, 2006

Outline

1. Motivation2. Key budgetary outcomes3. Budget inflexibilities 4. Formal rules5. Key players and the budget process

in practice6. Empirical evidence7. Conclusions

Motivation

• Fiscal outcomes have been disappointing

• Political institutions are an important part of the explanation of the changes in fiscal performance

• Role of the budget process has received little attention

• Here we focus on the budget process from a political economy viewpoint

Outline



SustainabilityCentral Government’s deficit:

Opposite trends relative to the region

-10

-8

-6

-4

-2

0

2

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

% P

IB

Colombia Latinoamérica

Source: Banco de la República, ECLAC, IMF, and Ministerio de Hacienda.

AdaptabilityOutput gap vs. fiscal thrust

(change in the cyclical component of the primary surplus)

Source: Authors’ calculations using data from Ministerio de Hacienda.

2005

2004

2003

200220012000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

19881987

1986

1985

19841983

1982

-0,05

-0,04

-0,03

-0,02

-0,01

0,00

0,01

0,02

0,03

0,04

0,05

-2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0

Impulso fiscal (% del PIB)

Bre

cha

del

PIB

(lo

gs)

EfficiencyExcessive expenditures relative to outcomes

Primary education

Bolivia

Brasil

Chile Colombia

Costa Rica

Ecuador

El Salvador

Guatemala

Honduras

México

Nicaragua

Panamá

Paraguay

Perú

República Dominicana

Uruguay

Venezuela

Latin America & Caribbean

80

82

84

86

88

90

92

94

96

98

100

2 2,5 3 3,5 4 4,5 5 5,5 6

Gasto en educacion (% del PIB)

Mat

ricu

lad

os

en p

rim

aria

(%

net

o)

Source: Authors’ calculations using data from World Bank Indicators.

Likewise for health outcomes

ZWE

ZMB

ZAR

ZAF

YUG

YEM

WSM

WLDVUT

VNM

VEN

VCTUZB

USAURY

UMC

UKR

UGA

TZA TUR

TUN

TTO TON

TMP

TKM

TJK

THA

TGO

TCD

SYRSYC

SWZ

SWE

SVN

SVK

SUR

STP

SSA

SOM

SMR

SLV

SLE

SLB

SGP

SEN

SDN

SAU

SAS

RWA

RUS

ROM

QAT

PRY

PRT

PRK

POL

PNG

PLW

PHL

PER

PAN

PAK

OMN

OEC

NZL

NPL

NOR

NLD

NIC

NGA

NER

NAM

MYS

MWI

MUS

MRT

MOZ

MNG

MNA

MMR

MLT

MLI

MKD

MIC

MHL

MEX

MDV

MDG

MDA

MCO

MARLVA LUX

LTU

LSO

LMY

LMC

LKA

LICLDC

LCA

LBY

LBR

LBN

LAO

LAC

KWTKOR KNA

KIR

KHM

KGZ

KEN

KAZ

JPN

JOR

JAM

ITAISR ISL

IRQ

IRN

IRL

IND

IDN

HUN

HTI

HRV

HPC

HNDHIC

GUY

GTM

GRD

GRC

GNQ

GNB

GMB

GIN

GHAGEO

GBR

GAB

FSM

FRA

FJI

FIN

ETH

EST ESP

ERI

EMU

EGY

ECU

ECA

EAP

DZA

DOM

DNKDMA

DJI

DEU

CZECYP CUB

CRI

CPV

COM

COLOMBIA

COG

CMR

CIV

CHN

CHL

CHE

CAN

CAF

BWA

BTN

BRN

BRB

BRA

BOL

BLZ

BLR

BIH

BHSBHR

BGR

BGD

BFA

BEN

BEL

BDI

AZE

AUT

AUS

ATG

ARM

ARG

ARE

ALB

AGOAFG

ADO

20

30

40

50

60

70

80

90

100

0 1 2 3 4 5 6 7 8 9 10

Gasto publico en salud (% del PIB)

Imm

un

izac

ion

tri

ple

vir

al (

% d

e n

ino

s en

tre

12

y 23

mes

es)

Source: Authors’ calculations using data from World Bank Indicators.

Representativeness

• The 1991 increased the number of players that participate in the budget process.

• Congress and the Constitutional Court play a much larger role.

• In addition, the pluralistic Consejo Nacional de Planeación must approve each administration's development plan before it submitted to Congress.

Outline



Budget inflexibilities

• This is the focus of most of the recent literature dealing with Colombia’s fiscal problems.

• According to the IMF (2004), Colombia is the country with the largest share of earmarked expenditures.

• Most of the rigidities are embedded in the Constitution, rulings of the Constitutional Court, or laws approved after the 1991 Constitution.

• In an environment characterized by many players, short horizons, lack of enforcement devices, rigid rules emerge as a natural outcome of the policymaking process.

Inflexibilities originated after 1991Earmarked revenues according to year of creation

(% of total 2003 budget)

Source: Ministerio de Hacienda

Inflexibilities: Constitutional Examples

• According to Art. 350, public social expenditure has priority over any other type of expenditure and may not be reduced (as percentage of the total budget) from one year to another.

• Similarly, the Constitution increased territorial transfers substantially (Art. 356) and allowed earmarking of revenues for social expenditure.

• Main problem: definition of public social expenditure is too broad.

Total vigencias futuras approved per year

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

4,0%

4,5%

5,0%

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

% P

IB

*Proyected.Source: Datos del DNP, cálculos de los autores.

Inflexibilities: the role of the executive (vigencias futuras % of each year's investment

budget)


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

% d

el p

resu

pu

esto

de

inve

rsió

n d

el P

GN

“Vigencias Futuras” by sector

0%

10%

20%

30%

40%

50%

60%

1995-1998 1999-2002 2003-2006

% r

ub

ro in

vers

ión

PG

N

Transporte Defensa y seguridad Agro Saneamiento Básico

0%

10%

20%

30%

40%

50%

1995-1998 1999-2002 2003-2006

% r

ub

ro in

vers

ión

PG

N

Vivienda Comunicaciones Justicia Industria y Comercio

0%

5%

10%

15%

20%

25%

1995-1998 1999-2002 2003-2006

% r

ub

ro in

ver

sió

n P

GN

Salud Energía Medio Ambiente Desarrollo Comunitario Educación Trabajo y seguridad social


Is the Budget Process Relevant?

• Many of these rigidities precede and constrain the budget process.

• But there is still a significant portion of resources to be allocated.

• More importantly, according to the Organic Budget Law, the Annual Budget Law may overrule expenditure mandated by other laws.

Outline



Budget Process: Formal rules of the formulation, discussion, and execution of

the budget 1. Law 38 of 1989:

• More flexibility to the line ministries to program their own expenditures

• Created the Consejo Nacional de Política Fiscal (CONFIS) and the Banco de Proyectos de Inversión (BPIN) to implement ex-ante cost-benefit analysis of investment projects.

2. The 1991 Constitution• More rigidities• More representativeness

3. Development Plan Law (Ley 152 de 1994) 4. Organic Budget Law - EOP (Decreto 111 de 1996)

• Compilation of previous legislation5. Fiscal Responsibility Law (Ley 819 de 2003) and

Decree 4730 of 2005.

Planning stage

How relevant is the planning stage? Development Plan vs. Final Execution (% GDP)

4,35%

-0,46%

0,21%

-6,21%

-0,19%

-2,71%

0,71%0,02%

-1,15%-0,12%

2,59%

-1,28%

-0,92%

0,32%

-2,43%

-0,89%

0,09%0,09%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

% d

el P

IB

1999-2002 2002-2006

Source: Authors’ calculations using data from Ministerio de Hacienda and DNP.

Preparation, discussion, and approval

Execution and control, monitoring and evaluation

Comparative evidence

Source: Filc and Scarstascini (2005)

CountryLow

RestrictionsMid

RestrictionsHigh

RestrictionsMain Modification

Argentina Fiscal Responsibility LawBoliviaBrazil Fiscal Responsibility LawColombia Fiscal Responsibility LawChile Structural Balance RuleCosta RicaEcuador Fiscal Responsibility LawHonduras Pluriannual PlanMexico Fiscal Responsibility LawNicaraguaPanama Fiscal Responsibility LawParaguayPeru Fiscal Responsibility LawDominican Rep.Uruguay Venezuela Fiscal Responsibility Law

Numeric Restrictions

Country Low Hierarchy Mid Hierarchy High Hierarchy

Argentina BoliviaBrazil ColombiaChileCosta RicaEcuadorHondurasMexicoNicaraguaPanamaParaguayPeruDominican Rep.Uruguay Venezuela

Procedure Rules

Country Low Transparency Mid Transparency High Transparency

Argentina BoliviaBrazil ColombiaChileCosta RicaEcuadorHondurasMexicoNicaraguaPanamaParaguayPeruDominican Rep.Uruguay Venezuela

Transparency Rules

Outline



Who are the key players?• President

– Although extremely powerful, the 1991 Constitution limited legislative powers (e.g., state of emergency and capacity to veto legislation).

• Cabinet– Extremely high turnover.– Expenditure ministers tend to follow political

careers.Ministros del gasto

Duración promedio (años) 1970 - 2006

Ministro de Agricultura 1.38Ministro de Protección Social* 1.57Ministro de Minas y Energía 1.33Ministro de Educación 1.57Ministro de Comunicaciones 1.38Ministro de Transporte 2.12Total 1.52

Ministro de Hacienda y Crédito Público 1.71*Antes de 2002 corresponde a Ministro de Salud

Who are the key players?• Congress

– Bicameral.– Each chamber is organized in seven committees,

according to policy areas.– The economic committees (3rd and 4th),

together with the constitutional committee (1st), are highly valuated by legislators. However, it is very difficult to become a member.• Legislators in these committees (specially in

Senate) show high incumbency rates and are very specialized.

– Another powerful committee is the Comisión de Crédito Público, in charge of approving all public debt operations.

Senate: 3rd committee composition 1991-2006

Nombre Partido Presidente Reelegido Nombre Partido Presidente ReelegidoVictor Renán Barco López Liberal 3S Victor Renán Barco López Liberal 3SJuan José García Romero Liberal 3S Juan José García Romero LiberalAurelio Iragorri Hormaza Liberal 3S Aurelio Iragorri Hormaza Liberal 3SJuan Manuel López Cabrales Liberal Si 3S Juan Manuel López Cabrales Liberal Si 3SLuis Fernando Londoño Capurro Liberal Si 3S Carlos Armando García Orjuela Liberal 3SLuis Guillermo Vélez Trujillo Liberal Si 3S Luis Fernando Londoño Capurro Liberal Si 3SFuad Ricardo Char Abdala Liberal 2S Camilo Sánchez Ortega Liberal 3SMaría Isabel Cruz Velasco Conservador 3S Luis Guillermo Vélez Trujillo Liberal Si 3SJorge Alberto Hernández Restrepo Otro 3S María Isabel Cruz Velasco ConservadorPedro Antonio Bonnett Locarno Liberal Jorge Alberto Hernández Restrepo OtroArmando Echeverri Jiménez Conservador Enrique Caballero Aduen Otro SiMaría Izquierdo De Rodríguez Liberal 2S Juan Martín Caicedo Ferrer Liberal 1SRodrigo Marín Bernal Conservador Piedad Córdoba De Castro Liberal 5SAníbal Palacio Tamayo Coalicion Gabriel Muyuy Jacanamejoy OtroTiberio Villareal Ramos Liberal 4C Guillermo Ocampo Ospina Conservador 2S

Juan Camilo Restrepo Salazar Conservador

Nombre Partido Presidente Reelegido Nombre Partido Presidente ReelegidoVictor Renán Barco López Liberal 3S Victor Renán Barco López Liberal SiAurelio Iragorri Hormaza Liberal 3S Aurelio Iragorri Hormaza* Liberal SiJuan Manuel López Cabrales Liberal 3S Juan Manuel López Cabrales Liberal Si SiPiedad Zuccardi Liberal 3S Piedad Zuccardi* Liberal SiCarlos Armando García Orjuela Liberal Si 3S Carlos Armando García Orjuela Liberal Si SiLuis Fernando Londoño Capurro Liberal Camilo Sánchez Ortega Liberal SiCamilo Sánchez Ortega Liberal 3S Jaime Dussán Calderón Otro SiLuis Guillermo Vélez Trujillo Liberal 2S Omar Yepes Alzate Conservador SiFuad Ricardo Char Abdala Liberal 2S Gabriel Zapata Correa Conservador Si SiJaime Dussán Calderón Otro 3S Luis Elmer Arenas Otro SiOmar Yepes Alzate Conservador Si 3S Javier Enrique Cáceres Leal Liberal SiGabriel Zapata Correa Conservador Si 3S Juan Manuel Corzo Román Conservador SiGabriel Camargo Salamanca Coalicion Si Mario Salomón Nader Muskus Conservador Si SiIsabel Célis Yañez Conservador José Darío Salazar Cruz Conservador SiJosé Antonio Gómez Hermida Conservador Luis Eduardo Vives Lacouture Liberal Si

Cuatro periodosTres periodosDos periodos

NOTA: en la casilla de reelegido aparece el numero de la comision y si pertenece a Camara o Senado.\*Pertenece a la Comision Interparlamentaria de Credito Publico

1991-1994 1994-1998

1998-2002 2002-2006

Sponsors secure the passage of the Budget Bill through Congress

0

5

10

15

20

25

30

1982

1983

1986

1987

1992

1994

1995

1996

1997

1999

2000

2001

2002

No

. d

e p

on

en

tes

Ley Anual de Presupuesto* Establecimientos Públicos

*Desde 1990 la Ley Anual de Presupuesto comprende a los Estableicimientos Públicos.

Source: Authors’ calculations using Fedesarrollo’s bills database.

Negotiating with Congress

• The executive’s main instrument to secure coalitions in Congress is the inclusion of investment projects (mostly regional and local) promoted by the legislators.

• The shape of these mechanism has changed throughout the years– Pre-1991: the infamous auxilios parlamentarios

(prohibited by the 1991 Constitution)– 1991-onwards: specific investment projects and

global line-items included in the Budget Law.• Most of the negotiation takes place during the

debates in the economic committees rather than during the plenary sessions.

Examples of vehicles used(as a % of total budget)


Año

Fondo de Cofinanciación

para la Inversión Social (FIS)

Fondo de Cofinanciación

para la Inversión Rural (DRI)

Fondo Nacional de Caminos Vecinales

(FNCV)

Fondo Nacional de Regalías (FNR)

1990 0,2% 0,8%1991 0,4% 0,8%1992 0,3% 0,6%1993 0,5% 0,6%1994 1,3% 1,0% 0,4%1995 1,4% 0,8% 0,2% 0,8%1996 1,4% 0,5% 0,2% 1,1%1997 0,8% 0,3% 0,1% 1,1%1998 0,3% 0,4% 0,1% 0,7%1999 0,1% 0,1% 2,4%2000 0,0% 0,1% 2,5%2001 0,2% 0,3% 5,6%2002 0,1% 0,1% 4,2%2003 0,0% 1,8%2004 1,3%2005 0,9%

Who are the key players?

• Constitutional Court– Created in the 1991, the Constitutional Court is a

very influential actor in the CBP, through the revision of bills, statues, treaties and rulings of tutelas.

– The fiscal implications of some of its latest rulings are noteworthy:• Public sector wages • Displaced population• Pension reforms in the last 15 years

– In practice, even if the executives secures an agreement with Congress, the Constitutional Court is a de-facto veto player.

Rulings of the Constitutional Court with budget implications:

An example• Four rulings on public sector wages• Constitutional revision of the 2000 budget law• All of them refer to Art. 53 of the Constitution

(Estatuto de los trabajadores) which establishes the “minimum fundamental principles”

• Remuneración mínima vital y móvil, estabilidad en el empleo, irrenunciabilidad a los beneficios mínimos establecidos, facultades para transigir y conciliar sobre derechos inciertos y discutibles, garantía a la seguridad social.

• Periodic readjustment of legal pensions

Specific rulings on public wages

• 2000: adjusted all public wages according to past year's inflation rate.

• 2001: Wages below the weighted average were raised according to the inflation rate. Remaining wages could be raised by less than the inflation rate.

• 2003: Wages below two minimum wages rose according to past year’s inflation rate. Other wages should increase by, at least, 50% the inflation rate.

• 2004: In a Presidential term (four years) wages should be adjusted according to that period’s inflation rate.

Outline



Changes in the budget’s amount and composition

• Stage I: from the Projecto de Ley (Budget Bill) to Ley de Presupuesto (Budget Law). These changes reflect the cost of approving the budget bill in Congress.

• Stage II: from the Ley de Presupuesto (Budget Law) to Final Appropriation (include all modifications during the fiscal year).

• Stage III: from Final Appropriation to Final Execution. Measure of efficiency of execution agencies.

Measuring amount changes in stage IBudget proposal vs. budget bill


-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

% P

IB

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003%

PIB

Funcionamiento Deuda Inversión

Total Budget Components

• The average increase in this stage was 0.41% of GDP (0.51% since 1991).

• The average change in the investment component was 0.28% of GDP (0.34% since 1991)


-1%

0%

1%

2%

3%

4%

5%

6%

7%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

% P

IB

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

% P

IB



• The biggest modifications (in terms of magnitude) take place during this stage.

• After 1991, net budget additions declined notably (2.7% GDP vs. 0.94% GDP).

Measuring amount changes in stage IIBudget bill vs. final appropriation

Example: the 2001 supplementary budgetMayor transformations to the supplementary budget bill reflect the

introduction of regional investment projects.

Source: Authors’ calculations using Proyecto de Ley 158 de 2001 y Ley 710 de 2001.

Proyecto de Ley 158 de 2001

Ley 710 de 2001

Departamento Administrativo Nacional de Planeación 8,39% 8,39%Ministerio de Minas y Energía 2,86% 2,86%INURBE 0,20% 0,49%Fondo Nacional de Caminos Vecinales (FNCV) 0,39% 0,62%Fondo de Cofinanciación para la Inversión Rural (DRI) 0,57% 0,79%Ministerio de Desarrollo 0,21% 0,37%INVIAS 0,96% 1,09%SENA 1,12% 1,23%Escuela Superior de Administración Pública (ESAP) 0,00% 0,07%Ministerio de Cultura 0,12% 0,18%IPSE 0,19% 0,25%COLDEPORTES 0,30% 0,36%Ministerio de Agricultura 1,00% 1,05%Policía Nacional 0,22% 0,23%Ministerio de Salud 0,00% 0,01%Otros 6,37% 6,36%Total 22,90% 24,33%*De la Ley de Presupuesto de 2001

Adiciones como % del presupuesto de inversión de 2001*

Entidad


-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

% P

IB

-1.8%

-1.6%

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

% P

IB



• Under-execution is typically larger for investment projects

Measuring amount changes in stage IIIFinal appropriation vs. Execution

Construction of indexes: changes in composition

1). Stage I: for each year.

2). Stage II: for each year. 3). Stage III: for each year.

Where Pi = component i as a % of total budget in Projecto de Ley (Budget Bill)

Li = component i as a % of total budget in Ley de Presupuesto (Budget Law)

Ai =component i as a % of total budget in Final Apropriation Ci =component i as a % of total budget in Final Execution N= number of components (three in this case)

N

LPI

N

iii

1

1

N

ALI

N

iii

1

2

N

CAI

N

iii

1

3

Changes in budget composition


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Índ

ice

Etapa I Etapa II Etapa III

• Same as before, the largest modifications took place in stage II.

• For all three stages, there are less changes among elements after 1991.

Determinants of modifications in Stage II

Variable dependiente

Etapa II: De la Ley de Presupuesto a la Apropiación Definitiva

Cambio en monto total -1,394 0,197 0,100 -0,470 -0,119(0,331) *** (0,101) * (0,031) *** (0,140) *** (0,042) ***

Cambio en monto funcionamiento -0,354 -0,007 0,043 -0,148 -0,057(0,173) * (0,065) (0,019) ** (0,079) * (0,025) **

Cambio en monto deuda -0,167 0,035 0,002 -0,038 0,007(0,132) (0,016) ** (0,009) (0,051) (0,020)

Cambio en monto inversión -0,870 0,171 0,055 -0,285 -0,070(0,162) *** (0,070) ** (0,021) ** (0,079) *** (0,023) ***

Cambio en composición -1,161 0,247 0,005 -0,311 -0,008(0,396) *** (0,245) (0,056) (0,258) (0,060)

Estimación por Mínimos Cuadrados Ordinarios, errores estándar robustos en paréntesis. Variables no reportadas: dummy primer año de gobierno, dummy último año de gobierno y una dummy para el año 1992. Número de observaciones: 36.

Interacción Post 1991 y Var.

% TCR

Interacción Post 1991 y Ciclo Económico

Post 1991Ciclo

EconómicoVar. % TCR

tt

ttttEi

TCRDPost

CicloEcoDPostTCRCicloEcoDPostmonto

*1991

*19911991

5

43210,

Outline



Conclusions

• Poor outcomes in terms of sustainability, adaptability and efficiency.

• Part of the problem are the large inflexibilities that result from a more contested political scenario (cooperation is harder to attain in the budget process and rigidities secure coalitions).

• However, formal rules and real practices are also important elements of the explanation.

• The mayor modifications to the budget don’t take place in the passage of the Budget Bill through Congress.– Moreover, additional resources in this stage were

moderate (on average, 0.41% of GDP).

Conclusions

• Changes take place in the second stage:– The executive negotiates support for other

legislative initiatives through regional investment projects, and

– Congress takes advantage of the supplementary budget petitions of the executive.

– Nevertheless, since 1991, there have been less changes during this stage.

• In short, Congress has more relative power than the formal rules predict.

• The same occurs with the Constitutional Court: the fiscal implications of it’s rulings and revisions are considerable.

Policy Recommendations• Reduce the use of inflexibilities in the budget

– Narrow down the definition of public social expenditure– Limit the use of Vigencias Futuras to investment projects

included in the administration’s Plan de Desarrollo and for a maximum of eight years (also helps to enhance the connection between planning and execution).

• Abolish the Comisión Interparlamentaria de Crédito Público.

• Establish that all investment projects included in the Budget Law should have an ex ante technical approval of the DNP.

• Require a technical report for all Constitutional Court rulings with a significant fiscal impact.

• Avoid the presentation of supplementary budgets in Congress, which implies a more careful programming of revenues and expenditures.

A Political Economy Analysis of the Budget Process in

Colombia

Mauricio CárdenasCarolina Mejía

Mauricio Olivera

Fedesarrollo

August 31, 2006

a political economy analysis of the budget process in colombia mauricio cárdenas carolina mejía...

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