Do more with less to face development traps and external challenges in LAC
Sebastian Nieto ParraHead of Latin America and the Caribbean OECD Development Centre
ECLAC Regional Seminar on Fiscal PolicySantiago de Chile, March 25th, 2019
Latin American Economic Outlook 2019
Development in Transition
2
3
Contents
Assessment
• Macroeconomic conditions
• Social debt: citizens’ demand and middle class
• (Bad) Perception on institutions and public services
• Taxes
Policy actions
• Expenditures
• Tax policy
• Comprehensive approach: strategic planning
4
Contents
Assessment
• Macroeconomic conditions
• Social debt: citizens’ demand and middle class
• (Bad) Perception on institutions and public services
• Taxes
GDP growth (% annual)
Source: For the OECD average the OECD Economic Outlook, Volume 2018 Issue. For the LAC average ECLAC and the IMF for 2020 (2019) World Economic Outlook Update, January 2019 5
LAC region: in 2019 GDP growth will be
(again) below OECD average (since 2014)
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
OECD LAC
Global trade and portfolio flows
6
The region is facing a less benign external
context
Source: OECD/CAF/UN ECLAC (2019), Latin American Economic Outlook 2019: Development in Transition, OECD Publishing, Paris,https://doi.org/10.1787/g2g9ff18-en.
-1.8
-1.5
-1.2
-0.9
-0.6
-0.3
0
0.3
0.6
0.9
1.2
1.5
7-day moving average 28-day moving average
B. Total emerging market portfolio flows reversals
-20
-15
-10
-5
0
5
10
15
20
25
30
A. Global trade(Annual v ariation with three-month moving average)
%
Volume Value
Latin America: Phases of external constraint and economic growth, 1960-2016
7
Current account deficit coupled with low
GDP growth
Source: OECD/CAF/UN ECLAC (2019), Latin American Economic Outlook 2019: Development in Transition, OECD Publishing, Paris,https://doi.org/10.1787/g2g9ff18-en.
Under low and vulnerable economic growth
8
Source: OECD/CAF/UN ECLAC (2019), Latin American Economic Outlook 2019: Development in Transition, OECD Publishing, Paris,https://doi.org/10.1787/g2g9ff18-en.
-2
-1
0
1
2
3
4
5
6
7
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
%
Trade war Faster US interest rate increase Baseline
GDP growth in Latin American economies with alternative scenarios
(Annual percentage rate)
Despite improvements, restricted fiscal
space
9
Gross public debt and primary fiscal balance in selected LAC countries
(Central government, percentage of GDP in 2016)
Source: OECD/CAF/UN ECLAC (2019), Latin American Economic Outlook 2019: Development in Transition, OECD Publishing, Paris,https://doi.org/10.1787/g2g9ff18-en.
ARG
BOL
BRA
CHL
COLCRI ECU SLV
GTMHTI
HND
MEX
NICPAN
PRYPER
DOM
URY
BRB
ATG
TTO
BHS
BLZ
DMAGRD
GUY
JAM
KNA
VCTLCA
SUR
LAC
0
20
40
60
80
100
120
140
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7
Gross public debt (% of GDP)
Primary fiscal balance (% of GDP)
A larger middle-class is driving up
aspirations and demands (for good)…
Latin American population by socio-economic groups
(% population)
Note: The affluent, those that earn over 50 USD per day are not included.Source:OECD/ECLAC/CAFbased on LACEquity Lab tabulations of SEDLAC (CEDLAS and the World Bank, 2017). 10
21.1
35.4
32
37.6
42.9
24.6
15
20
25
30
35
40
45
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Middle class (USD 13.00-70.00) Vulnerable (USD 5.50-13.00) Poor (under USD 5.50)
Likewise, satisfaction with public services
has declined
Satisfaction with selected public services in Latin America, Southeast Asia and OECD
(% population)
Source:OECD/ECLAC/CAFbased on GallupWorldMonitor 2017.
11
0
10
20
30
40
50
60
70
80
90
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
B. Satisfaction with the educational system
Latin America & Caribbean
Southeast Asia OECD
0
10
20
30
40
50
60
70
80
90
2006200720082009 2010 2011 2012 2013 2014 2015 2016 2017
A. Satisfaction with quality healthcare
Latin America & Caribbean
Southeast Asia OECD
… unmet for the time being
Satisfaction with public medical and health services in Latin America, 2015
(% socio-economic group)
Source:OECD/ECLAC/CAFbased on The 2015 Americas-Barometerby the Latin AmericanPublic Opinion Project (LAPOP 2015), www.LapopSurveys.org.
12
Tax morale in Latin America
(Do you find it justifiable not to pay taxes?, % population)
Source:OECD/ECLAC/CAFown elaboration based on Latinobarometro.
13
Lower trust and increasing dissatisfaction
translate into lower willingness to pay taxes
53.4
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2013 2015 2016
Never justifiable Justifiable
% of population
Tax revenues in LAC have increased, but are
still far below the OECD levels
14
Tax revenue in LAC
(% GDP)
Source:OECD/ECLAC/CIAT/IDB (2017), Revenue Statistics in Latin America and the Caribbean
0
5
10
15
20
25
30
35
40
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Differences (OECD-LAC) in tax-to-GDP ratios (p.p) LAC average (% of GDP) OECD average (% of GDP)
The institutional trap in Latin America with low
GDP growth and restricted macro conditions
15
Lower trust and
increasing dissatisfaction
Lower tax morale
Low tax revenues
Unmet/Rising aspirations of the
middle class
16
Contents
Assessment: the institutional trap
• Higher aspirations
• (Bad) Perception on institutions and public services
• Taxes
Policy actions
• Expenditures
• Tax policy
• Comprehensive approach: strategic planning
To overcome the institutional traps: more
quality spending in social protection is needed
17
Public social expenditure in OECD countries and LAC
(% of GDP)
Source: OECD/CAF/UN ECLAC (2019), Latin American Economic Outlook 2019: Development in Transition, OECD Publishing, Paris,https://doi.org/10.1787/g2g9ff18-en.
0
5
10
15
20
25
30
35
% of GDP
2016 2003
Source: World Development Indicators 2018 and RICYT (2018).
Research and development expenditure
The region lags behind in key public
investments as research and development
0
0.5
1
1.5
2
2.5
3% of GDP
Panel A. R&D expenditure LAC OECD
East Asia & Pacific World
LAC worse and best
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
% of total
R&D
Panel B. R&D expenditure by source of funds, 2016Government Business EnterpriseHigher Education Non-profit organizationsAbroad
19
Therefore, LAC needs to do more with less
Examples on:
• Education
• Connectivity
• R&D
• Tax policy
School endowments and performance:
Private vs. Public Schools
-60
-40
-20
0
20
40
60
80
100
120
140
Others OECD MEX COL CHL ARG LA CRI PER BRA URY
Private Private after controlling for ESCS of student Private after controlling for ESCS of student and school
Performance differences between private and public schools before and after controlling ESCS
Source: Avendaño, R., Barrera F., Nieto Parra S. and Vever F. (2016), "Understanding student performance beyond traditional factors: Evidence fromPISA", OECD Development Centre Working Papers, No. 331, OECD Publishing, Paris.
School endowments and performance:
“soft policies” to increase performance
Some cost-effectivepedagogical actions associated to quality of the educational system in Latin America……Whereas some traditional inputs not necessarily linked with performance.
Effect on performance in mathematics
(in months of schooling, after a 1-s. d. change)
-3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2
Extra-curricular classes
Feedback
Tutorials
Use of assessment data
High expectations
Classroom time
Private status
Proportion of certified teachers with ISCED5A
Proportion of certified teachers
Class size ^(1/2)
Latin America OECD
Traditional factors
Pedagogical factors
Source: Avendaño, R., Barrera F., Nieto Parra S. and Vever F. (2016), "Understanding student performance beyond traditional factors: Evidence fromPISA", OECD Development Centre Working Papers, No. 331, OECD Publishing, Paris.
Source: World Development Indicators 2018
Time to export, border compliance
(hours)
Using “soft” policies: cost-effective policies
to increase connectivity
0
20
40
60
80
100
120
288
Source: Bitran, E., Nieto-Parra, S. and Robledo, J.S. (2013), “Opening the Black Box of Contract Renegotiations: An Analysis of Road Concessions in Chile, Colombia and Peru”, OECD Development Centre Working Papers 317
Renegotiation costs of concession contracts in selected countries
0
10
20
30
40
50
60
70
80
90
100
1993
1994
1995
1995
1995
1996
1996
1997
1997
1997
1998
1998
1998
1999
1999
1999
2001
2002
2002
2003
2004
1994
1994
1994
1994
1994
1994
1995
1995
1996
1997
1999
2001
2002
2004
2004
2006
2007
2007
2007
2007
2007
2010
2010
2010
2010
2003
2005
2005
2005
2005
2005
2007
2007
2007
2009
2009
2009
2009
2010
Chile Colombia PERU
%
Value of initial contract Additional cost
PPPs can be costly to governments: To
spend better through PPPs (more info
needed)
24
Improve efficiency of R&D expenditure
0
5
10
15
20
25
30
35
40
45
50
Source: World Development Indicators 2018 and the OECD Patent applications dataset.
Ratio of number of patents/R&D expenditure (% of GDP)
25
Room to improve the use of taxes and transfers to reduce income inequalities
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Gini coefficient
Market income Disposable income
Source: INEC (2016); Lustig (2017); OECD/CAF/ECLAC(2018); and Commitment to Equity (CEQ) Institute at TulaneUniversity, NewOrleans.
Impact of taxes and transfers on income distribution
in Latin America, the European Union and selected OECD economies
Improving tax expenditure information
availability is critical to improving program
targeting
Countries in which tax expenditure
estimations are carried out by national
institutions on a regular basis
• Argentina – MECON
• Bolivia – Ministry of Economy and Public
Finances
• Brazil – Receita Federal
• Chile – Internal Revenue Service
• Costa Rica – Ministry of Finances
• Ecuador – Internal Revenue Service
• Dominican Republic – Ministry of Finance
• Guatemala – Tax Administration Agency
• Mexico – SHCP
• Peru – SUNAT
• Uruguay – DGI
Tax expenditure estimations are not
regularly produced and their estimation is
outsourced
• Colombia - World Bank (2012)
• El Salvador – Funde (2010)
• Honduras – CIAT (2012)
• Nicaragua – (2010)
• Panama - (OECD MDCR 2018)
• Paraguay – GIZ,CIAT and SET (2015)
• Venezuela – ECLAC (2008).
27
From a feared to an enabler tax collector,
the Swedish example
0
5
10
15
20
25
30
2001 2002 2004 2006 2012 2016
Sh
are
, %
If I had the opportunity, I would not declare taxable income
(Share that agree)
1970 2000 2017 2026
Feared tax collector Popular service agency Enabler
Public employment
Private employment
Self-employment
28
LAC needs innovative capacities to face
internal traps and external uncertainty
Do more with less to face development traps and external challenges in LAC
Sebastian Nieto ParraHead of Latin America and the Caribbean OECD Development Centre
ECLAC Regional Seminar on Fiscal PolicySantiago de Chile, March 25th, 2019
Wealthier individuals opt out of public
services into private services
Enrolment in private schools in Latin America, 2014
(% secondary students in private schools, by income quintile)
Source:OECD/ECLAC/CAFbased on SEDLAC(CEDLAS and the World Bank, 2016).
30
0.0
500,000.0
1,000,000.0
1,500,000.0
2,000,000.0
2,500,000.0
3,000,000.0
Private Investment Present Funds Deferred Funds
Total value of
initial contract
Value including
renegotiations
Division between
payments by the
private and the
State
Large part of State
payments made
through deferred
funds
Case of Colombia: PPPs on road concessions
Source: Bitrán E., S. Nieto-Parra and J.S. Robledo (2013)Note: Values in Millions of constant Pesos of Dic/09
Perception of corruption in government in Latin America, Southeast Asia and OECD
(percentage)
Source:OECD/ECLAC/CAFown elaboration based on data from GallupWorld Poll (2017)
32
… and the perception of corruption is on
the rise
