The impact of democratic transitions on budgeting and public expenditures A Latin American perspective Ángel Melguizo OECD Development Centre 4th Annual Meeting of Middle East and North Africa Senior Budget Officials MENA-OECD Governance Programme Beirut, September 21-22, 2011
Democratic transitions, budgeting and public expenditures Sharing experiences from Latin American... Democratic transitions: quality matters (and takes time) Risks from fast responses to pressing social demands The challenging political economy of fiscal policy Low taxation, limited redistribution and weak tax morale Transitions as windows of opportunity Good practices in fiscal policy making The emerging middle class and their expectations Next decade s challenge: a state for development 2
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Number of countries Polity Index Democratic transitions: quality matters (and takes time) Democratic consolidation in Latin America and the Caribbean 20 18 16 14 12 10 8 6 4 2 Number of democracies Number of autocracies Average democracy score (scale -10 to 10) 9 8.9 8.8 8.7 8.6 8.5 8.4 8.3 8.2 8.1 0 8 Notes: Following the criteria of Marshall and Cole (2009) countries are classified as a democracy if their Polity score is greater or equal to six Source: Daude and Melguizo (2010), based on the Polity IV database, accessed in May 2010 Democratic transitions make visible institutional weakness which demand time (and political determination) to be solved 3
1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Risks from fast responses to social demands Democratic transition in Brazil and government consumption (% GDP) 25 20 15 10 5 0 End of millitary dictatorship New Constitution is approved Source: OECD (2010b), based on the World Development Indicators database Gradual responses to social demands allow avoiding permanent economic imbalances (start with strategic programmes, easy to administrate) 4
Risks from fast responses to social demands Impact of elections on fiscal policy in OECD and Latin America, 1990-2006 (% GDP) 0,1 0,0-0,1-0,2-0,3-0,4-0,5-0,6-0,7-0,8 OECD P rimary balanc e Latin America 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0-0,1 OECD P rimary ex penditure Latin America Note: Calculated as the difference between the fiscal variable (as a proportion of GDP) during the election year and prior non-election years Source: Nieto Parra and Santiso (2009) Young political systems are vulnerable to electoral-based decisions (presidential elections can be associated with fiscal volatility) 5
Argentina Brazil Chile Colombia Mexico Peru Denmark Finland France Germany Greece Ireland Italy Netherlands Poland Portugal Spain Sweden United Kingdom The challenging political economy of fiscal policy Personal Income Tax in LAC vs. OECD, 2008 (% GDP) Income inequality pre/post taxes-transfers, 2000s (Gini coefficient) 60 50 Inequality before taxes and transfers Inequality after taxes and transfers 40 30 20 10 0 Source: OECD Revenue Statistics and Revenue Statistics in Latin American ECLAC-CIAT-OECD (forthcoming) Source: OECD (2011) Despite the medium voter theorem, Latin America has traditionally shown low tax collection, high inequality... 6
The challenging political economy of fiscal policy Tax morale in Latin America and OECD countries ( Do you think cheating on taxes is justifiable? ) Never Justifiable Justifiable 70% 60% 50% 40% 30% 20% 10% 0% OECD Latin America Source: Daude and Melguizo (2010), based on Latinobarometro and World Value Survey... and a weak social contract between citizens and the state 7
Transitions as windows of opportunity 20.0 Direct fiscal tax burden in Spain and OECD countries (% GDP) Some factors making tax reform happen: 15.0 10.0 5.0 0.0 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Spain_PIT Spain_SS Spain_PIT_average OECD Solid research and analysis Framing the tax reform Transparency and effective communication Peer pressure Leadership and electoral mandate Source: OECD Revenue Statistics 8
Good practices in fiscal policy making Chile 12.00 10.00 8.00 6.00 4.00 2.00 0.00-2.00-4.00 Cyclical Commodity related Observed Adjusted Adjusted primary budget balance (Percentage points of GDP) Peru 6.00 5.00 4.00 3.00 2.00 1.00 0.00-1.00-2.00 Cyclical Commodity related Observed Adjusted -6.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008-3.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Note: General government primary budget balance is adjusted for deviations of GDP and commodity prices (round their trends Source: Daude et al. (2010) Innovative policies (e.g. PPP in infrastructures, fiscal rules, social protection, conditional cash transfers), based on accumulated experience 9
Good practices in fiscal policy making (electoral cycles update) Impact of 2006 presidential elections in LAC on fiscal policy (% of GDP) Note: Calculated as the difference between the fiscal variable (as a proportion of GDP) during the election year and prior non-election years Source: Nieto Parra and Santiso (2009) The 2006 round of elections showed significantly a better performance 10
Frequency The emerging middle class and their expectations Attitudes towards democracy (% support and satisfaction) Distribution of political preferences (0 extreme left, 1 extreme right) 80% Support for democracy Satisfaction with functioning of democracy 40.0% Q1 Q2-Q4 Q5 70% 35.0% 60% 30.0% 50% 25.0% 40% 30% 20% 10% 20.0% 15.0% 10.0% 0% 1 2 3 4 5 Perceived Income Quintile Source: OECD (2010b), based on Latinobarometro 5.0% 0.0% 0 1 2 3 4 5 6 7 8 9 10 Left - Right self-reported preferences Growing middle sectors are the main supporters of democracy (but not much satisfied), and politically moderate 11
The emerging middle class and their expectations 60 55 50 45 40 35 30 37 35 33 31 29 "Good Citizens pay their taxes" (percentage of respondents who agree) Q1 Q2 Q3 Q4 Q5 "Tax evasion is never justified" (percentage of respondents who agree) 50 45 40 35 30 25 100 80 60 40 "Taxes are too high" (percentage of respondents who agree) Q1 Q2 Q3 Q4 Q5 Satisfaction with health services Satisfied Not satisfied No Access How middle class is Latin America? Risk of downwards mobility Relatively outside the social contract (low taxed and not fully benefiting from education nor health) 27 20 25 Q1 Q2 Q3 Q4 Q5 0 Q1 Q2 Q3 Q4 Q5 Source: OECD (2010b) Their demands for better advanced services, less inequality, and institutions free of corruption evolve very rapidly 12
Next decade s challenge: a state for development Challenges for public policies in Latin America: Rebuild macro resiliences (institutions), compatible with long-term needs Strategic planning (anticipate demands and challenges; productive policies) Implement ambitious fiscal reforms (more/better taxation and benefits) Increase efficiency, effectiveness and transparency in the public sector Involve the middle class Towards a fiscal pact, monitored and evaluated 13
Democratic transitions, budgeting and public expenditures... to North Africa and the Middle East Democratic transitions: quality matters (and takes time) Risks from fast responses to pressing social demands The challenging political economy of fiscal policy Low taxation, limited redistribution and weak tax morale Transitions as windows of opportunity Good practices in fiscal policy making The emerging middle class and their expectations Next decade challenge: a state for development 14
Selected references 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. OECD. Paris. DAUDE, C., A. MELGUIZO and A. NEUT (2010), Fiscal policy in Latin America: countercyclical and sustainable at last?, OECD Development Centre Working Paper 291. OECD. Paris. ELIZONDO, C. and J. SANTISO (2011), Killing me softly: local termites and fiscal violence in Latin America, forthcoming in J. Dayton-Johnson and J. Santiso (eds.), Handbook of Political Economy in Latin America. Oxford University Press. Oxford. GAVIRIA, A. (2007): Social mobility and preferences for redistribution in Latin America, Economia 8(1), pp. 55-88. MARCEL, M. (2008), Movilidad, desigualdad y política social en América Latina, mimeo. NIETO-PARRA, S. and J. SANTISO (2009), Revisiting political budget cycles in Latin America, OECD Development Centre Working Paper 281. OECD. Paris. OECD (2010a), Making reform happen. Lessons from OECD countries. OECD. Paris. OECD (2010b), Latin American Economic Outlook 2011. How middle-class in Latin America?. OECD Development Centre, Paris. OECD (2011a), Government at a glance. Second edition. OECD. Paris. OECD (2011b), Latin American Economic Outlook 2012. Reform of the state for development. OECD Development Centre, Paris. Forthcoming. TORGLER, B. (2005), Tax morale in Latin America, Public Choice, 122(1/2), pp. 133-157. 15
The impact of democratic transitions on budgeting and public expenditures A Latin American perspective Choukran jaziran www.oecd.org/dev 4th Annual Meeting of Middle East and North Africa Senior Budget Officials MENA-OECD Governance Programme Beirut, September 21-22, 2011