Going for Growth and Development

Paris, May 2008

Javier SantisoDirector, OECD Development Centre

2

11 Growth and DevelopmentGrowth and Development

33 The fiscal transitionThe fiscal transition

22 Fiscal policy: Quality and accountabilityFiscal policy: Quality and accountability

3

Latin America has left the 1980s behind, recuperating growth 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

Peru symbolizes the complex relationship between growth, development and democracy

Growth in average consumption per capita, 2004-2006 (household survey)

1st ro

un

d v

ote

sh

are

of

A

PR

A (

Garc

ía’s

part

y)

min

us

vote

sh

are

of

U P

P

(Hu

mala

’s p

art

y)

Source: OECD Development Centre, 2007. Based on Instituto Peruano de Economía, Perspectivas de la economía peruana, Oct. 2007 and Jurado Nacional de Elecciones, Elección Presidencial y Congresal, 2006, Resultados.

Humala’s party received more votes than García’s in the three fastest growing regions of the country

Loreto

Madre de Dios

Ama-zonas

Caja-marca

Pîura

Lamba-yeque

La Libertad

Lima

San Martin

Ancash HuánucoUcayali

Pasco

Junín

Ica

Huancavelica

Ayacu-cho

Apu-rímac

Cuzco

Puno

Arequipa

Moque-gua

Tacna

TumbesLoreto

Madre de Dios

Ama-zonas

Caja-marca

Pîura

Lamba-yeque

La Libertad

Lima

San Martin

Ancash HuánucoUcayali

Pasco

Junín

Ica

Huancavelica

Ayacu-cho

Apu-rímac

Cuzco

Puno

Arequipa

Moque-gua

Tacna

Tumbes

Loreto

Madre de Dios

Ama-zonas

Caja-marca

Pîura

Lamba-yeque

La Libertad

Lima

San Martin

Ancash HuánucoUcayali

Pasco

Junín

Ica

Huancavelica

Ayacu-cho

Apu-rímac

Cuzco

Puno

Arequipa

Moque-gua

Tacna

Tumbes

*Water, electricity, telephone, Source: Household survey, Enaho 2005

Percentage of the population with two or more basic

services, 2005*

Electoral results first round presidential elections – 2006

Source: Peru’s Electoral office

Others

APRA (García)

UPP – PNP (Humala)Less than 50%

Between 50% and 75%

75% or more

Source: OECD Development Centre, 2007. Based on Instituto Peruano de Economia, Perspectivas de la economía peruana, Oct. 2007

Poverty and politics are closely linked in the case of Peru

6

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 participated in 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

7

Source: OECD Development Centre, 2007. Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2007.

% population in poverty

Poverty is falling but it still affects a large portion of the population

Millions of people in poverty

8

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

9

11 Development and democracyDevelopment and democracy

33 The fiscal transitionThe fiscal transition

22 Fiscal policy: Quality and accountabilityFiscal policy: Quality and accountability

10

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

11

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

12

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, 2006)

13

% 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

14

11 DevelopmentDevelopment andand democracydemocracy

33 The fiscal transitionThe fiscal transition

22 Fiscal policy: Quality and accountabilityFiscal policy: Quality and accountability

15

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

16

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)

17

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

And equity: Regressive fiscal policies damage legitimacy

18

Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social .

Social spending is regressive,especially social security

19

Source: OECD Development Centre, 2007. Based on Freedom House (2007) and ECLAC and OECD Revenue Statistics (2007).

Policy dialogue and openness is key for financial accountability

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

Media quality and independence(Index: 0-30=Not free, 31-60=Partially free, 60-100 Free)

Ta

x R

eve

nu

e(2

004

% G

DP

)

20

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

)

21

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 on policy options, if they are financially independent

It not a technical but rather a political issue

Going for Growth and Development

Paris, May 2008

Javier SantisoDirector, OECD Development Centre