Poverty Reduction and Growth:Virtuous and Vicious Circles

Javier Santiso

Chief Economist / Deputy Director

Development Centre OCDE

OECD-World Bank Conference Paris 23 October 2006

2

Poverty Reduction and GrowthI

Addressing Inequality Through Efficiency II

Fiscal and Democratic LegitimacyIII

ConclusionsIV

3

Poverty Reduction and Growth in Latin America

World Bank Key Policy Messages

Latin America’s twin disappointments of low growth and persistent inequality and poverty have travelled hand in hand a long way

Without growth there is no poverty reduction, but poverty itself may hinder growth (e.g. it hinders access to credit and education)

Virtuous and vicious circles are possible

What is pro-poor growth? A pace and a pattern of growth that enhances the ability of poor people to participate in, contribute to and benefit from growth (DAC/POVNET)

The fiscal challenge

“Converting the state into an agent that promotes equality of opportunities and practices efficient redistribution is, perhaps, the most critical challenge Latin America faces in implementing better policies that simultaneously stimulates growth and reduce inequality and poverty”

4

Latin America is not closing the gap with richer countries, its growth is disappointing

Source: based on Angus Maddison, Historical Statistics.

The World Economy, Paris, OECD, 2003.

Source: International Financial Statistics, IMF, 2006.

GDP EVOLUTION

0

10

20

30

40

50

60

70

80

90

100

1820

1850

1870

1890

1900

1910

1917

1932

1940

1950

1960

1970

1980

1990

2000

Year

Per

centa

ge

of U

S G

DP

Mexico Brazil

GDP AVERAGE GROWTH1998-2005

2.0

3.1 3.23.6

6.3

8.9

4.0 4.2

0

1

2

3

4

5

6

7

8

9

10

Brazil Mexico South Africa Chile Slovaquia Korea India China

Perc

enta

ge

.

5

… while other regions are accelerating their converge processes with richer economies

CONVERGENCE PROCESS IN BRAZIL AND MEXICO WITH RESPECT TO OTHER EMERGING ECONOMIES

Source: OECD Development Centre, 2006.

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

cap

ita G

row

th m

inu

s a

vera

ge w

orl

d G

DP

per

cap

ita (

% y

earl

y)

. Mexico Brasil

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 -45GDP Deviation (%) with respect to world average ($ 1990)

GD

P p

er

cap

ita G

row

th m

inu

s a

vera

ge w

orl

d G

DP

per

cap

ita (

% y

earl

y)

.

China India

6

Poverty Reduction and GrowthI

Addressing Inequality Through Efficiency II

Fiscal and democratic legitimacy III

ConclusionsIV

7

Income inequality continues to be a major challenge and disappointment in the region

Inequality Indicators

Source: World Development Indicators, 2006.Source: WIDER Database, 2006.

EVOLUCION DE DESIGUALDADES 1970-2004 (COEF. GINI)

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

1968 1977 1984 1989 1992 1994 1996 1998 2000 2002 2004

Gin

i .

Mexico Brazil Spain United States

INEQUALITY AND WEALTH CONCENTRATION 2005

0

10

20

30

40

50

60

70

80

Richest 10% againstpoorest 10%

Richest 20% againstpoorest 20%

Gini IndexPe

rcen

tage

.

Brazil Mexico Spain United States

8

In the OECD inequality is reduced through taxation and social spending, but not in Latin

America

Source: The World Bank.

Gini – Market Income Gini –Disposable Income(after taxes and s. security)

Note: Gini coefficient calculated before and after taxes and transfers, illustrating their low incidence on inequality levels, in contrast with other regions.

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Latin America European UnionUnited States Spain0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Latin America European UnionUnited States Spain

9

There is some evidence that more taxes might lead to quality public goods

ALB

ARE

ARG

ARM

AUSAUT

AZE

BDI

BEL

BGD

BGR

BHR

BIH

BO L

BRA

BRB

CAN

CHE

CHL

CHN

CO LCRI

CZE

DEU

DNK

DO M DZA

ECU

ESP

EST

ETH

FIN

FRA

GBR

GEO

GRC

GTM

HND

HRVHUN

IDN

IND

ISL

ISR

ITA

JAMJO R

KAZ

KEN

KGZ

KO R

KWT

LKA

LSO

LTU

LUX

LVA

MAR

MDA

MDG

MEX

MLT

MNG

MUS

MYS

NAM

NIC

NLD

NO R

NPL

NZL

PAK

PAN

PERPHL

PO L

PRT

PRY

RO M

RUS

SGP

SLV

SVK

SVN

SWE

THA

TJK

TUN

TUR

UGA

UKR

URY

USA

VEN

ZAF

ZMB

1 11 21 31 41 51 61

Tax Revenue % of GDP

Qual

ity

of In

fras

truct

ure

Low quality

High quality

10

Strengthening fiscal effort might not be enough: Significant differences in

Mexico/Brazil tax revenue

Source: Eduardo Lora, Mauricio Cárdenas. “La reforma de las instituciones fiscales en América Latina”. Banco Interamericano de Desarrollo, Fedesarrollo, 2006. OECD, “Recent tax Policy trends and reforms in OECD Countries”, OECD.

TAX REVENUE AS PERCENTAGE OF GDP 2005

0

5

10

15

20

25

30

35

40

OCDE Brazil Spain USA Colombia Chile Argentina Peru Mexico Venezuela

Perc

en

tag

e

11

Is more better? Tax revenue in Brazil is higher than economies of similar income level

Source: The World Bank, 2006.

Note: x-axis corresponds to the logarithm of the GDP per capita in current US dollars.

FISCAL BURDEN AND GDP PER CAPITA

USA

UKSpain

Italy

Germany

France

Uruguay

PeruNicaragua

MexicoHonduras

Colombia

Brazil

Bolivia

Argentina

0.000.050.100.150.200.250.30

0.350.400.45

4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5

Log(GDP per capita in current US dollars)

Fis

cal

Reven

ue (

% G

DP

)

12

Yet both Mexico and Brazil perform poorly in setting high health standards

POPULATION WITH LOW NUTRITION LEVELS

0

2

4

6

8

10

12

14

1990-92 2000-02

Porc

enta

ge o

f To

tal

. Mexico Brazil

Spain United States

Health Indicators

Source: OECD Development Centre, 2006.

Based on: World Development Indicators, 2006.

Note: Data from UNICEF and WHO adjusting by disease underreporting and classification errors.

MORTALITY AND MATERNAL MORTALITY INDICATORS

0

50

100

150

200

250

300

1970 2003 2000 (ajust.)

Infant Mortality Ratio (for 1000 live births) Maternal Mortality ratio (per100.000 live births)

Tota

l in

div

iduals

. Mexico Brazil

Spain United States

13

More or better? And both perform poorly in attaining educational standards

Porcentaje de estudiantes por cada nivel de desempeño en Matemáticas

Por debajo del Nivel 1 Nivel 1 Nivel 2 Nivel 3 Nivel 4 Nivel 5 Nievel 6

100

75

50

25

0

25

50

75

100

Fin

land

Kor

ea

Can

ada

Hon

g K

ong-

Chi

na

Net

herl

ands

Mac

ao-C

hina

Liec

hte

nste

in

Japa

n

Aus

tral

ia

Sw

itzer

land

Icel

and

New

Ze

alan

d

Den

ma

rk

Bel

gium

Cze

ch R

epub

lic

Fra

nce

Irel

and

Sw

ede

n

Aus

tria

Slo

vak

Rep

ublic

Nor

way

Ger

ma

ny

Luxe

mb

ourg

Pol

and

Spa

in

Hun

gary

Latv

ia

Uni

ted

Sta

tes

Por

tuga

l

Rus

sian

Fed

erat

ion

Ital

y

Gre

ece

Ser

bia

Uru

guay

Tur

key

Tha

iland

Mex

ico

Bra

zil

Tun

isia

Indo

nesi

a

Porcentaje de estudiantes

Source: Based on PISA Report OCDE, 2003.

Din

am

ar

ca

Ésl

ovaq

uia

Ale

man

ia

Percentage of Students on each performance level (Maths)

Below level 1 Level 2 Level 3 Level 4

Level 5 Level 6Level 1

Percentage of Students

14

Performance is relatively poor even for the well-off

Source: En base a Informe PISA, OECD, 2003

Index of social, cultural and economic status

Performance in the mathematics scale Performance in the mathematics scale

Index of social, cultural and economic status

Relationship between student performance and socio-economic contextRelationship between student performance and socio-economic context inside the schoolsRelatioship between school performance and socio-economic context

Index of social, cultural and economic status

Performance in the mathematics scalePerformance in the mathematics scale

Index of social, cultural and economic status

15

More is not better: At similar levels of expenditure it is possible to perform better

Source: En base a Informe PISA (OECD), 2003

SCHOOL PERFORMANCE AND EXPENDITURE - OECD

Czech Republic Denmark

Greece

Irland

Italy

Korea

Norway

Portugal

Spain

Switzerland

USA

Austria

Canada

FinlandFrance

Germany

HungaryIceland

Japan

Mexico

Netherlands

Slovak Rep.Sweden

350

400

450

500

550

600

0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 90 000

Accumulated expenditure per student primary and secondary school (US dollars)

Perf

orm

an

ce in

Math

em

ati

cs

16

Poverty Reduction and GrowthI

Addressing Inequality Through Efficiency II

Fiscal and democratic legitimacy III

ConclusionsIV

17

Efficiency of fiscal institutions is key

BUDGETARY INSTITUTIONS AND FISCAL RESULTS 2000-2002

Nicaragua

Bolivia

Guatemala

VenezuelaMexico

Brazil

UruguayParaguay

Ecuador

Argentina Peru

ChileColombia

-0.05

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

0 1 2 3 4 5 6 7 8 9

Primary results Government / GDP

Bu

dg

eta

ry In

stit

uti

on

s In

dex (

1-1

0)

18

A strong civil society improves tax collection

ARG

AUT

BEL

BGR

CHE

CHLCZE

DEU

DNK

ESP

EST

FINFRA

GBR

GRC

HRV

HUN

ISL

ITA

LTU

LUX

LVA

MEX

NLD

PO L

RUS

SVK

SVNSWE

UKR

USA

r = 56%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Civil society Index

Tax R

evenue %

of G

DP

Source: Civil society index is from the Glasius, Marlies, Mary Kaldor and Helmut Anheier (eds.) Global Civil Society Yearbook 2002 Global Civil Society 2002; tax revenue is from World Development Indicators, average 2000s, World Bank.

19

Because incentives and civil society involvement improve the quality of fiscal

institutions

Source: C. Santiso. “Auditing for accountability? Political economy of government auditing and budget oversight in emerging economies. Johns Hopkins University, 2006.

INSTITUTIONAL INDICATORS

0

0.2

0.4

0.6

0.8

1

1.2

Argentina Brazil Chile Colombia Mexico Peru

Indic

ato

r

Institutional Effectiveness Index Independence

Credibility Enforcement

20

Ultimately we must realize that fiscal and democratic legitimacy go hand in hand

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

20% 30% 40% 50% 60% 70% 80% 90% 100%

Voter Turnout, presidential elections (1996 - 2002)

Tot

al g

ener

al g

over

nmen

t exp

endi

ture

- %

GD

P

Argentina

Bolivia

Brazil

Chile

ColombiaCostaRica

DominicanRepublic

Guatemala

Venezuela

Mexico

NicaraguaPeru

Paraguay

El Salvador

Uruguay

Source: Lora (2006) “El Futuro de los Pactos Fiscales en América Latina” mimeo IADB.

Paper presented at the Economic Forum of the Iberoamerican Summit held in Barcelona 6-7 October 2006.

21

Conclusions

The problem does not lie on increasing taxes, but on improving the quality of social expenditure.

For this, fiscal institutionality needs to be enhanced, and incentives should be created to improve civil surveillance.

A pressing challenge consists on measuring and treating fiscal violence.