European CommissionImplementation of tax reforms in developing countriesBrussels - May 16th, 2014
Fiscal policy in emerging and developing economiesSome experiences from Latin America
Ángel Melguizo
Head, Americas Desk
OECD Development Centre
2
Fiscal policy in emerging and developing economiesSome experiences from Latin America
Making fiscal reform happen in developing and emerging economies
• Diagnostic and design• Implementation• Approval
3
Fiscal policy in emerging and developing economiesA conceptual framework
Tax policy cannot be analyzed separately from expenditures
• Budget constraint• Political economy: willingness to pay higher taxes vs. perceived public services
Main approaches
• Tax-benefit analysis : • How fiscal policy affects households’ incomes?• How fiscal policy is perceived by citizens?
• Macro-analysis (e.g. infrastructure and fiscal policy)
4
Fiscal policy in emerging and developing economiesSome experiences from Latin America
Making fiscal reform happen in developing and emerging economies
• Diagnostic and design• Implementation• Approval
5
Diagnostic and design: good tax data is needed…
Tax revenue over GDP
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
Tax revenues over GDP in LAC have been converging to OECD levels since 1990…
0
5
10
15
20
25
30
35
40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Difference (A-B) LAC (A) OECD(34) (B)
6
Diagnostic and design: good tax data is needed…
Tax revenues(%GDP, 2012)
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
… but there are significant differences in terms of composition, and among Latin American economies
Tax structure(%GDP, 2012)
0 10 20 30 40
OECD (34)
LAC (18)
Guatemala
Dominican Republic
Venezuela
El Salvador
Honduras
Paraguay
Peru
Panama
Nicaragua
Colombia
Mexico
Ecuador
Chile
Costa Rica
Bolivia
Uruguay
Brazil
Argentina
25.4
16.9
33.8
17.7
6.2
Impuestos sobre la renta y las utilidades Contribuciones a la seguridad social
Impuestos generales sobre el consumo Impuestos específicos sobre el consumo
Otros impuestos
33.5
26.2
20.3
10.7
9.3
AL (18) OCDE (34)
7
Diagnostic and design: good tax data is needed…
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
Statistics should take into account the regional specificities (e.g. commodities, social insurance schemes, federalism)
0 20 40 60 80 100
Bolivia (E.P.)
Peru
Chile
Ecuador
Argentina
Colombia
Venezuela (R.B.)
Brasil
México 7.7
12.2
3.3
3.1
14.7
2.8
4.4
9.8
2.2
%GDP
PEMEX
Fiscal revenues from non-renewable resources (billion USD and %GDP)
Diagnostic and design: … coupled with good analysis
8
Source: OECD (2008), Latin American Economic Outlook 2009
Inequality in Latin America and the OECD(Gini indexes before and after taxes and public spending)
0
10
20
30
40
50
60
Arge
ntina
Braz
il
Chile
Colo
mbi
a
Mex
ico Peru
Denm
ark
Finlan
d
Fran
ce
Germ
any
Gree
ce
Irelan
d
Italy
Neth
erlan
ds
Polan
d
Portu
gal
Spain
Swed
en
Unite
d Ki
ngdo
m
Inequality before taxes and transfers Inequality after taxes and transfers
Diagnostic and design: … coupled with good analysis
9
Source: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?
Tax-benefit structure by household income deciles(Percentage of the decile mean disposable income)
Chile Mexico
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
I II III IV V VI VII VIII IX X
Taxes Social spending Net transfers
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
I II III IV V VI VII VIII IX X
Taxes Social spending Net transfers
Diagnostic and design: … coupled with good analysis
10
Source: OECD (2011), Latin American Economic Outlook 2012: Transforming the State for Development
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Arge
ntina
Braz
il
Chile
Colo
mbi
a
Mex
ico
Peru
OEC
D (n
on-L
A)
Market income After taxes and transfers
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Chile
Mex
ico
OEC
D (n
on-
LA)
Market income
+ Cash transfers
- Income tax
+ Education (in-kind)
+ Health (in-kind)
Inequality in Latin America and the OECD(Gini indexes before and after taxes and public spending)
11
Fiscal policy in emerging and developing economiesSome experiences from Latin America
Making fiscal reform happen in developing and emerging economies
• Diagnostic and design• Implementation• Approval
12
Implementation: effectively putting in place a reform demands
• Technical capacity
• Improving fiscal frameworks• Data• Budgeting• Rules• Institutions
13
Implementation: the lack of technical capacity is very costly
PPP renegotiations are the norm in emerging and developing economies, multiplying initial cost estimates
Source: Bitrán, E., S. Nieto-Parra and J.S. Robledo (2013), “Opening the black box of contract renegotiations: an analysis of road concessions in Chile, Colombia and Peru.”, OECD Development Centre Working Paper 317.
Road concession contracts in Latin America (% total cost)
14
Implementation: the role of fiscal frameworks
Fiscal policy tends to be pro-cyclical in Latin America…
URU02
URU03
ARG02
-0.06
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
-0.25 -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15
Varia
tion
of c
yclic
ally
adj
uste
d pr
imar
y ba
lanc
e
Output gap
Output gap and variation of adjusted primary budget balance(%GDP)
Source: Daude, C., A. Melguizo and A. Neut (2010), “Fiscal Policy in Latin America: Countercyclical and Sustainable at Last?”, OECD Development Centre Working Paper 291
15
Implementation: the role of fiscal frameworks
… and very sensitive to the political cycle
Source: Nieto-Parra, S. and J. Santiso (2009), “Revisiting political budget cycles in Latin America”, OECD Development Centre Working Paper 281
P rimary balanc e
-0,8
-0,7
-0,6
-0,5
-0,4
-0,3
-0,2
-0,1
0,0
0,1
OECD Latin America
P rimary ex penditure
-0,1
0,0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
OECD Latin America
Impact of elections on fiscal policy, 1990-2006 (%GDP)
16
Implementation: the role of fiscal frameworks
Rules seem to be working, at least during the last crisis (e.g. Chile and Peru)
Chile
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Cyclical Commodity related Observed Adjusted
Peru
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Cyclical Commodity related Observed Adjusted
Source: Daude, C., A. Melguizo and A. Neut (2010), “Fiscal policy in Latin America: Countercyclical and sustainable at last?”, OECD Development Centre Working Paper 291
Adjusted primary budget balance(%GDP)
17
Implementation: the role of fiscal frameworks
Overall, the 2006 round of elections did not impact that much
P rimary balanc e
-1
0
1
2
3
4
5
P rimary ex penditure
-2
-1
0
1
2
3
4
5
Source: Nieto-Parra, S. and J. Santiso (2009), “Revisiting political budget cycles in Latin America”, OECD Development Centre Working Paper 281
Impact of 2006 round of elections on fiscal policy in Latin America (%GDP)
18
Fiscal policy in emerging and developing economiesSome experiences from Latin America
Making fiscal reform happen in developing and emerging economies
• Diagnostic and design• Implementation• Approval
19
Approval: citizens’ support is low
Latin America (and most emerging and developing regions) exhibits a low tax morale
Source: Daude, C. and A. Melguizo (2010), “Taxation and more representation? On fiscal policy, social mobility and democracy in Latin America”, OECD Development Centre Working Paper 294
Do you think cheating on taxes is justifiable?
0%
10%
20%
30%
40%
50%
60%
70%
OECD Latin America
Never Justifiable Justifiable
20
Approval: gaining citizens’ support, from the middle
A particularly relevant segment of the population is the emerging middle class…
Attitudes towards democracy
0%
10%
20%
30%
40%
50%
60%
70%
80%
1 2 3 4 5Perceived Income Quintile
Support for democracy Satisfaction with functioning of democracy
Source: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?
21
Approval: gaining citizens’ support, from the middle
… but today they conform an unsatisfied majoritySource: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?
30
35
40
45
50
55
60
Q1 Q2 Q3 Q4 Q5
"Good Citizens pay their taxes"(percentage of respondents who agree)
25
30
35
40
45
50
Q1 Q2 Q3 Q4 Q5
"Taxes are too high"(percentage of respondents who agree)
25
27
29
31
33
35
37
Q1 Q2 Q3 Q4 Q5
"Tax evasion is never justified"(percentage of respondents who agree)
0
20
40
60
80
100
Q1 Q2 Q3 Q4 Q5
Satisfaction with health services
Satisfied Not satisfied No Access
How middle class is Latin America?
• Risk of downwards mobility
• Outside the social contract (low taxed; critical and not fully benefiting from education or health care services)
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Fiscal policy in emerging and developing economiesSome experiences from Latin America
Making fiscal reform happen in developing and emerging economies
• Diagnostic and design: Data and sound tax-benefit analysis
• Implementation Technical capacity and favourable fiscal
frameworks
• Approval Tax morale and the social contract
Thank you!
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