United Nations Research Institutefor Social Development

Financing Social Policy in Mineral-rich Contexts:

Ch ll d O t itiChallenges and Opportunities

Katja Hujo

26-27 May 2011O D l t I tit t L d

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Overseas Development Institute, LondonFinancing Social Protection in LICs: Finding the common ground

Financing Social Policy the IssuesFinancing Social Policy – the Issues

• Transformative Social Policy: contributes to production, reproduction, protection andproduction, reproduction, protection and redistribution

approach revenue and expenditure policies inapproach revenue and expenditure policies in tandem

aim at mutually reinforcing systems! aim at mutually reinforcing systems!

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Financing Social PolicyFinancing Social Policy

FinancingFinancing

Resource mobilization

-Efficiency gains-Fund reallocationmobilization Fund reallocation

Revenue sources Financing techniques Expenditure policies

Taxation/contributionsAid/L

private/public Social services

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Aid/LoansRemittances/OOP

Mineral Rents

funded/PAYGDirect/indirect tax

Social protectionLabour market policies

The ChallengeThe Challenge…

• is to build social policies on…is to build social policies on financial arrangements that are

i bl i fi l d li i lsustainable in fiscal and political terms, equitable/progressive andterms, equitable/progressive and conducive to economic development

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The economic context mattersThe economic context matters

Discussion about fiscal space cannot be separated from issues of macroeconomic policyseparated from issues of macroeconomic policy and implications of economic context:National context: growth path/development modelNational context: growth path/development modelGlobal context: crisis, trade and financial regime etc.

EXAMPLES:EXAMPLES:Tax revenues are related to income levelRent production and capture in mineral-rich

countries

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Tax Revenue as % of GDP per country group

• The aggregate 35% gg gview: tax shares in % of GDP rise

i h i l l22.5%

29.4%

23.2%25%

30%

with income level

S Bi d d Z l

18.3%

15%

20%

Source: Bird and Zolt (2005).

5%

10%

0%

5%

Low Middle High Total$0 - $4999 $5000 - $19999 $20000 +

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$0 - $4999 $5000 - $19999 $20000 +

ButBut…

• …social expenditure is also a policy variable!

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Government expenditure on social protection, social insurance and social assistance as % of GDP in selected countries (Barrientos 2010)

Social Country Protection Social Insurance Social Assistance

Argentina 2004 9.2 7.7 1.5

Brazil 2004 13.2 11.7 1.4

Chile 2003 7.6 6.9 0.7

Colombia 2004 6.5 5.9 0.6

Dominican Republic 2004 2.4 0.7 1.7p

Guatemala 2000 1.8 0.7 1.1

Mexico 2002 3.5 2.6 1.0

P 2004 3 6 3 1 0 5Peru 2004 3.6 3.1 0.5

Bangladesh 3.8 0.3 0.1

Indonesia 1.9 1.3 0.3

Mongolia 10.5 7.8 1.1

Nepal 2.2 1.0 0.1

Pakistan 2.0 1.7 0.1

8Vietnam 3.5 1.9 0.5

Tax collection and composition in l t d t i i S b h Af iselected countries in Sub-saharan Africa

Country Years Tax revenue % GDP

Trade taxes % totalGDP total

Congo (DR) 1998-2002 4.5 32

T i 1992 99 9 6 35Tanzania 1992-99 9.6 35

Uganda 1998-2003 11.4 16

Botswana 1993-98 32.5 18

South Africa 1998-2002 25.5 13

Zambia 1990 99 18 1 129

Zambia 1990-99 18.1 12

Mineral rentsMineral rents

• Opportunities• Challenges• Challenges

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Importance of Oil Exports for LICsImportance of Oil Exports for LICs

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The QuestionsThe Questions

• Are countries rich in minerals blessed or cursed?cursed?

• Can revenues from the mineral sector be channelled into social development?channelled into social development?

• Under what conditions?

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Commodity Prices: Volatile but rising? (IFS 2009)

Monthly Commodity Price Index (2005=100)Metals Average Petroleum Spot Fuel (Crude Oil Natural Gas and Coal )

250

300Metals Average Petroleum Spot Fuel (Crude Oil, Natural Gas, and Coal )

100

150

200

0

50

100

1992

M119

93M1

1994

M119

95M1

1996

M119

97M1

1998

M119

99M1

2000

M120

01M1

2002

M120

03M1

2004

M120

05M1

2006

M120

07M1

2008

M120

09M1

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Share of government revenues in oil rent (in % of total, UNCTAD TDR 2010)

70

80

50

60

70

30

40

50 AngolaAzerbaijanVenezuelaChad

10

20

30

0

10

2002 2003 2004 2005 2006 2007 2008 2009

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Share of government revenues in copper rent (in % of total, UNCTAD TDR 2010)

70

80

50

60

30

40ChileIndonesiaZambia

10

20

02002 2003 2004 2005 2006 2007 2008

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Crisis effects: Fiscal BalanceCrisis effects: Fiscal Balance

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Crisis dilemmaCrisis dilemma

• Commodity prices fell sharply during crisis (2009) leading to decrease in revenues(2009) leading to decrease in revenues

• Fiscal policy in oil-producing LICs highly procyclical (Villafuerte & Lopez Murphy 2010)procyclical (Villafuerte & Lopez Murphy 2010)

• Oxfam report (Kyrili & Martin 2010) recommends raising taxes on foreign investors in extractiveraising taxes on foreign investors in extractive industries – timing?

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Mineral rents and financing SPMineral rents and financing SP

• Can mineral rents ease the financing constraint?• Can mineral rents ease the financing constraint?• Challenges:

– Dutch disease effects and volatility– State capacity and democratic governance– Build a social consensus on the use of funds:

• Norway: Government Pension Fund Global • Bolivia: Renta Dignidad financed through Direct

Hydrocarbons Tax (32% production tax 2005) • Chile: Extension of Social Pension Coverage (2008)

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UNRISD project on « Social Policy in Mineral-rich Countries »

• Forthcoming edited volume• Thematic papers• Thematic papers

– Growth and development, economic policy, welfare regimes and state revenues institutions and stateregimes and state revenues, institutions and state capacity

• Case studiesCase studies– Norway, Chile, Botswana, Indonesia, Nigeria

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Findings: economic policy, growth and development

• Manage productive process and revenue extraction (rent capture) in a balanced way: tax policy and contracts with f i i t !foreign investors!

• Aim to limit Dutch disease effects• Manage debt carefully• Manage debt carefully• Diversify and invest in knowledge production/education• Let public company compete with private firms (NorwayLet public company compete with private firms (Norway,

Chile)• Create equitable rent distribution policy (compensate

producing communities for costs, equalize living conditions)

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Findings: institutions, state capacity and politics

• State Capacity: mobilize resources, allocate them strategically, enforce standards andthem strategically, enforce standards and regulation, create consensus, provide or regulate social services/programmesregulate social services/programmes

• Positive institutional change cannot be imposed from outsidefrom outside

• Reform: function more important than form

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Findings: social policy and welfareFindings: social policy and welfare

• Social policy addresses many problems mineral-rich countries face: growth, employment, social g p ycohesion, political legitimacy

• Mineral rents can provide the funding base for p gSP

• The mining/oil sector can be a pioneer in social gprovisioning and decent work

• Social policies can create employment opportunities (works against gender bias inherent in mineral production)

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Findings: foreign investors and the global economy context

• Global commodity markets• FDI and monitoring of TNC• FDI and monitoring of TNC• Climate change policies and regulations• Creditor policies• Trade barriers towards processed natural

resources• Policy space for industrial and monetary policiesPolicy space for industrial and monetary policies

(e.g. capital controls)?

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A strategic approach towards the financing of social policy requires

• Reliable calculations on estimated costs of planned programmes over longer periods and taking into account different scenarios[1][ ]

• Evaluation of different funding sources and financing techniques and their pros and cons from a political, economic and social point of vieweconomic and social point of view

• Analysis of relevant experiences in other countries• Early dialogue with relevant stakeholders, including y g , g

Social and Finance Ministries, external donors, international organizations, social partners, civil society organizations etc.g

• Contingency plan for crisis situation•

[1] Thi h b d b h ILO i h d h S i l P i Fl24

[1] This has been done by the ILO with regard to the Social Protection Floor; Helpage International has done several studies on cost estimates for social pensions.

ConclusionsConclusions

• Financing mix is country specific, what is a (national, global) political priority is affordable

• Domestic revenues are best suited to create synergies between economic and social development

• External resources have the potential to complement• External resources have the potential to complement these, especially in low-income countries

• Mineral rents can open up fiscal space if context and p p ppolicies are supportive: national consensus on rent distribution crucialS f l t f ti f i t t• Successful transformation of resources into outcomes depends on politics and quality of institutions

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BibliographyBibliography– Barrientos, Armando. 2010. Social Protection and Poverty. Social Policy and

D l t P N 42 UNRISD G i dDevelopment Paper No. 42, UNRISD, Geneva. www. unrisd.org– Bird, Richad and Eric Zolt 2005. Redistribution via taxation: the limited role of the

personal income tax in developing countries. UCLA Law Review, Vol. 52, No. 6.– Di John, Jonathan 2008. Fiscal Reforms, Developmental State Capacity and p p y

Poverty Reduction. Background paper for UNRISD poverty report on Combating Poverty and Inequality.

– Hujo, Katja (ed.). Mineral Rents and the Financing of Social Policy: Opportunities and Challenges. UNRISD/Palgrave, forthcoming.

– IMF 2011. Fiscal Monitor. April 2011. www.imf.org– IMF 2009. International Financial Statistics.– Kyrili, Katerina and Matthew Martin 2010. The Impact of the Global Economic

Crisis on the Budgets of Low-Income Countries. Oxfam Research Report, JulyCrisis on the Budgets of Low Income Countries. Oxfam Research Report, July 2010. www.oxfam.org

– UNCTAD 2010. Trade and Development Report. Employment, globalization and development. (Table 5.2)

– Villafuerte Mauricio and Pablo Lopez-Murphy 2010 Fiscal Policy in OilVillafuerte, Mauricio and Pablo Lopez Murphy 2010. Fiscal Policy in Oil Producing Countries During the Recent Oil Price Cycle. IMF WP 10/28

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Thank you!

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