Fiscal and democratic legitimacy in Latin America
27 October 2007
Javier SantisoEconomista Jefe
Centro de Desarrollo de la OCDE
Agenda de Desarrollo Iberoamericana 2007Barcelona
2
11 Development and democracyDevelopment and democracy
33 The fiscal transitionThe fiscal transition
22 Fiscal policy: Quality and accountabilityFiscal policy: Quality and accountability
3 Never had there been so much democracy in the continent
Source: OECD Development Centre, 2007. Based on Polity IV project. Note: Polity2 score shown, average of available data for Latin America. Poilty2 is the sum of two indicators “democracy” (0 to10) and “autocracy” (0 to -10 ). These indicators focus on institutionalized aspects of the polity, i.e. de jure. “Democracy is conceived as three essential, interdependent elements.One is the presence of institutions and procedures through which citizens can express effective preferences about alternative policies and leaders. Second is the existence of institutionalized constraints on the exercise of power by the executive. Third is the guarantee of civil liberties to all citizens in their daily lives and in acts of political participation. ” The autocracy index focuses on how restricted political participation is; whether chief executives are chosen in a regularized process of selection within the political elite, and once in office they exercise power with few institutional constraints; and whether theyexercise a high degree of defectiveness over social and economic activity.
The 1980s represent a dramatic turn around for the region in terms of polity
Democracy
Autocracy
4
The region has left the 1980s behind and is recuperating grown in GDP per capita terms
Source: OECD Development Centre, 2007. Based on Angus Madison, Historical Statistics. The World Economy, Paris, OECD, 2003; and Polity IV project. Data is average of available data.
2000
1990
1980
1970
1960 1950
1940
1930 1920
1910 1900
1890 1880
1870 1860
1850 1840 1830 1820
0
1000
2000
3000
4000
5000
-6 -4 -2 0 2 4 6 8
Democratic governance (Polity IV)
GD
P p
er
ca
pit
a (
Ma
dd
iso
n)
more autocracy more democracy
The 1980s were lost in terms of GDP per capita but not in terms of political reform
5Democracy is alive and well:
Elections are competitive affairs
Source: OECD Development Centre, 2007. Based on Daniel Zovatto “Balance Electoral de América Latina 2005 /2006”, in Latinobarómetro, Executive Report 2006 , Political Database of the Americas and Wikipedia (when based on official results).Note: Support is the share of votes of the election winner and margin is the difference with the second highest recipient of votes.
Continuity
Change
Support(% votes)
Margin(% victory)
1st round 50 19
2nd round
51 9
Number of countries
Share (%)
Continuity 8 44
Change 10 56
6
Source: OECD Development Centre based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006 and official press release of the Presidency of Chile, 23 September 2007.
% GDP annual growth
Growth has resumed … but it is still far from other emerging economies
China
India Latin America
7Latin American economies have been
loosing grown for some time
Source: OECD Development Centre, 2007. Based on Maddison (2003).
GDP per capita absolute terms GDP per capita relative to US
Plebiscite in Chile, 1988
8… while other regions are accelerating their converge processes with richer economies
Source: OECD Development Centre, 2007. Based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005.
Note: Annual growth (%) calculated as the average annual rate for the last six decades. Deviation (%) at the beginning of each decade.
1950
19601970
1980
1990
1980
1950
1960
1970
2000/06
1990
2000/06
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
-30 -10 10 30 50 70 90
GDP deviation (%) with respect to world average ($ 1990)
GD
P p
er
ca
pit
a G
row
th
min
us
av
era
ge
wo
rld
GD
P p
er
ca
pit
a (
% y
ea
rly
)
. Mexico Brazil
1950
1960
1970
1980
1990
2000/06
1950
19601970
1980
19802000/06
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
-85 -75 -65 -55 -45
GDP Deviation (%) with respect to world average ($ 1990)G
DP
pe
r c
ap
ita
Gro
wth
m
inu
s a
ve
rag
e w
orl
d G
DP
pe
r c
ap
ita
(%
ye
arl
y)
.
China India
Convergence process in Brazil and Mexico compared with other emerging economies
9
Source: OECD Development Centre, 2007. Based on IMF , Globalization and Inequality, 2007. OECD* includes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Singapore, Spain, Sweden, UK, US.
The poorest segments of the population have not joined into the prosperity
0
5
10
15
20
25
-101234567
Q1 Q2 Q3 Q4 Q5
Latin America
1993 2003 change
Unlike other regions, growth in Latin America has left out the poor
GD
P p
er c
ap
ita
by
qu
intile
GD
P p
er c
ap
ita
by
qu
intile
GD
P p
er c
ap
ita
by
qu
intile
GD
P p
er c
ap
ita
by
qu
intile
Qu
inti
le a
nn
ua
l g
row
th
in G
DP
pe
r c
ap
ita
Qu
inti
le a
nn
ua
l g
row
th
in G
DP
pe
r c
ap
ita
Qu
inti
le a
nn
ua
l g
row
th
in G
DP
pe
r c
ap
ita
Qu
inti
le a
nn
ua
l g
row
th
in G
DP
pe
r c
ap
ita
10
Source: OECD Development Centre, 2007. Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006.
% population in poverty
Poverty is falling but it still affects a large portion of the population
Millions of people in poverty
11
Source: OECD Development Centre, 2007. Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006.
Improvements in inequality are modest or absent
deteriorations
improvements
Changes in inequality during the last decade
12
Source: CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006 and official press release of the Presidency of Chile, 23 September 2007.
“There is no mature and constructive democracy when equity and social justice are not tackled …our
democracies have not been efficient … they have not managed to rapidly improve the living condition of the
people, especially of those in most need, and the political consequences are visible today.”
President Michelle Bachelet at the European Union - Latin America
Forum on Social Cohesion
13
11 Development and democracyDevelopment and democracy
33 The fiscal transitionThe fiscal transition
22 Fiscal policy: Quality and accountabilityFiscal policy: Quality and accountability
14
Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006)
Fiscal policy plays a very limited redistributive role, especially taxation
Gin
i co
effi
cien
t
Inequality before and after taxes and transfers
Po
ints
of
Gin
i c
ha
ng
e
(% c
ha
ng
e i
n i
ne
qu
ali
ty)
The effects of taxes and transfers
15
Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006).
Gin
i co
effi
cien
t
There is no Latin curse:Quality fiscal policy is not a matter of DNA
Inequality before and after taxes and transfers
16
Overall Balance 1990-2006p
Latin America average Country forecast 2006
Source: OECD Development Centre, 2007. Based on ECLAC, Economic Survey of Latin America and the Caribbean, 2006-2007, June 2007.
Fiscal reform has achieved fiscal discipline
17
Source: OECD Development Centre, 2007. Based on Filc and Scartascini (2007), “Budgetary Institutions” in Lora, The State of State Reform in Latin America, IADB and Stanford University PressNote: To construct the figure, the reforms were weighted in accordance with their relevance and direction and were normalized between 0 and 1. So, each curve shows the transition of the institutions from their initial situation in 1990 to their situation in 2005. The slope measures the number of reforms and their relative importance.
The path of reform for fiscal institutions
Reform has succeeded in strengthening fiscal institutions
18
Source: OECD Development Centre, 2007. Based on ECLAC’s ILPES Database and OECD Revenue Statistics Database.
But reform has failed to raise significantly more revenue
Tax revenue (Central Government, % GDP, 2006p)
19
Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006) for tax productivity, Lora (2007) for tax exemptions (original source: Gómez-Sabaini) and Schneider and Enste (2005) for shadow economy.
Tax productivity has increased, but remains low for income taxes due to widespread
loopholes and informality
Tax productivity (rate/revenue)
Shadow economy (%GDP)
Tax exemptions (% GDP)
20
Source: OECD Development Centre, 2007. Based on Jiménez, J. P. V. Tromben. “Fiscal policy and the commodities boom: the impact of higher prices for non-renewables in Latin America and the Caribbean”. Cepal Review 90. December 2006.
Revenues from non-renewable as a share of total fiscal revenue
(1990-2005)
Coefficient of Variation in fiscal revenues
(1990-2005)
Revenue systems lean on commodities and produces unpredictability
21
% of citizens who trusttax revenue is well spent
(2003-05)
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, 2003-2006.
The result is very limited political capital to work with… fiscal legitimacy is low
Firms’ assessment of the neutrality/composition of government
decisions/spending (2003-2006)
Fairer/Wiser
Unfair/ Wasteful
22
11 DevelopmentDevelopment andand democracydemocracy
33 The fiscal transitionThe fiscal transition
22 Fiscal policy: Quality and accountabilityFiscal policy: Quality and accountability
23
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003).
Argentina
Bolivia Brazil
Chile
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
Panama
ParaguayPeru
Uruguay
Venezuela
0
5
10
15
20
25
30
35
40
45
50
0 5 10 15 20 25 30
Fiscal legitimacy (% who trust taxes are well spent)
Dem
oc
rati
c p
erfo
rman
ce
(% s
atis
fied
with
dem
ocra
cy)
Fiscal legitimacy enhances democratic governance
24
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005).
Fiscal legitimacy enhances democratic governance
Fiscal legitimacy (% who trust taxes are well spent)
Dem
oc
rati
c p
erfo
rman
ce
(% s
atis
fied
with
dem
ocra
cy)
25
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and ECLAC’s Panorama Social
Social cohesion and fiscal legitimacy go hand in hand
Inequality (Gini coefficient 2000s)
Fis
ca
l le
git
ima
cy
(%
trus
t tax
es w
ell s
pent
)
26
Education Expenditures and Performance
Mexico
NorwayPolandSlovak Republic
Spain United States
Brazil
Indonesia
Thailand
Tunisia
Uruguay
300
350
400
450
500
550
600
- 5,000 10,000 15,000 20,000 25,000 30,000
Annual expenditure on educational institutions per student (2001) in equivalent US dollars converted using PPPs, by level of education, based on full-time equivalents
Mat
hem
atic
s S
core
(P
ISA
200
3)
Source: OECD Development Centre, 2007. Based on PISA (2003) and OECD Education at a Glance (2005)
It is not (only) a question of quantity but of quality (efficiency)
27
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social.
URG
PER
PAR
NIC
MEXGTM
ECU
CRI
COL
CHL
BRA
BOL
ARG
URG
PER
NIC
MEX
HDN
GTM
SLV
CRI
COL
CHL
BRA
BOL
ARG
URG
MEXGTM
ECU
CRI
COL
BRA
BOL
ARG
5
25
-0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Social expenditures are … (quasi-gini)
Fis
cal l
egit
imac
y (%
trus
ts ta
xes
are
wel
l spe
nt)
Education Health Social Security
progressive regressive
But equity matters as well: Regressive fiscal policies damage legitimacy
28
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social .
Social spending is regressiveSpecially social security
29
Source: OECD Development Centre, 2007. Based on Freedom House (2007) and ECLAC and OECD Revenue Statistics (2007).
KoreaUnited States
SwitzerlandIreland
Slovak Rep.Turkey
Spain
ItalyFrance
Sweden
Haiti
Venezuela Mexico
Ecuador PeruBolivia
Nicaragua ChileCosta RicaColombia
UruguayArgentina
Brazil
0
10
20
30
40
50
0 10 20 30 40 50 60 70 80 90 100
Freedom of the press(Index: 0-30=Not free, 31-60=Partially free, 60-100 Free)
Tax
Rev
enu
e(2
004
% G
DP
)
Policy dialogue and openness is key for financial accountability
30
Source: OECD Development Centre, 2007. Based on Freedom House (2007).
Venezuela
Venezuela
Chile
Chile
LatAm avge
LatAm avge
Not free
Partially free
Free
1988 Chile’s plebiscite
The democratic transition has not resulted in an overall transition in the media
31
Source: OECD Development Centre, 2007. Based on ECLAC’s ILPES and Latinobarómetro (2003, 2005).
Relaying more on taxes to finance public spending enhances fiscal legitimacy
Relative price of government services(share of taxes on total spending)
Fis
ca
l le
git
ima
cy
(%
trus
t tax
es w
ell s
pent
)
32
Source: OECD Development Centre, 2007. Based on ECLAC ILPES database and Payne et al. (2007) Democracies in Development - Politics and Reform in Latin America International IDEA.
Fiscal policy is a powerful tool to promote democratic participation
Relative price of government services(share of taxes on total spending)
Vo
ter
turn
ou
t(2
000-
05 p
resi
dent
ial e
lect
ions
)
33
Conclusions
Democracy puts fiscal policy at the heart of the relationship between the state and its citizens
Building broad consensus is paramount to success in the implementation of fiscal reforms
Local Think-Tanks can play a crucial role in fostering constructive dialogue over policy options, if they can count with financial independence
It not a technical but rather a political issue
34
Follow ups
Latin American Economic Outlook 2009
Policy Dialogue event
OECD-Club de Madrid sponsored policy dialogues
Current and past Ministers of Finance
Best practices, mutual learning
Fiscal and democratic legitimacy in Latin America
27 October 2007
Javier SantisoEconomista Jefe
Centro de Desarrollo de la OCDE
Agenda de Desarrollo Iberoamericana 2007Barcelona